The Office for Budget Responsibility (OBR) has forecast that UK house prices will fall by 4.7 per cent in 2024.
An average British home will be worth £266,000 by the end of next year, the OBR predicted in its Economic and Fiscal Outlook report.
Applying this calculation to London, where the Office for National Statistics reports the average London property cost £537,000 in September 2023, a 4.7 per cent drop would see it cost £511,761.
This represents a fall of 7.6 per cent since the last house price peak in 2022.
“The outlook for house prices is particularly sensitive to changes in interest rates and household income growth,” the report said.
The dark art of price prediction
It could take until 2027 for house prices to recover to 2022 peak levels, the OBR predicted.
“There was always going to be a house price correction and it really is a buyers’ market now,” Aaron Strutt, product director at Islington-based mortgage advisors Trinity Financial.
First-time buyers on the hunt for a flat in 2024 could get a discount – although it’s worth noting that most London flats are leasehold and won’t be as solid an investment as a house.
“Flats and houses are included in the OBR calculations, but flats are likely to take the brunt of the reductions particularly with the shortage of family size houses,” Strutt told Homes & Property.
“Houses tend to hold their values better.”
The OBR’s predictions are in line with Savills’ latest forecast, which estimated UK house prices will fall in 2024 – 3 per cent across the UK and 4 per cent in London – before bottoming out.
"People who think you can predict house prices would be better off doing your horoscope”
But buying agent Henry Pryor cautioned against taking forecasts as facts.
“Most of the people who think you can predict house prices would be better off doing your horoscope,” Pryor told Homes & Property.
“The OBR don’t know much more about the future than I do, and their past form wouldn’t encourage you to ask them to read your palm,” he added.
Instead, he said, people should be aware that “there is no ‘average house’” and the property market is more of “patchwork quilt with a multitude of mini markets” than a single entity.
“Most importantly, nobody can predict house prices let alone to a tenth of one percent.”
Mortgage rate pain could continue
Another factor noted by the OBR is that, even with house prices dropping, average mortgage rates will remain as high as 5 per cent in 2027.
Although rates on new mortgages are already dropping, this higher figure is because the current elevated interest rates will keep passing through the stock of existing mortgages.
“Prior to the financial crisis, when Bank Rate was last raised to current levels, only around half of all outstanding mortgages were fixed rate contracts,” said the OBR report.
“Today around 85 per cent are on a fixed term, with two thirds of these on a term longer than two years.”
After years of low interest, these higher mortgage rates will impact property prices.
“Money is more expensive to borrow and looks likely to remain more expensive next year,” said Pryor.
“If the average rate is 5 per cent over the next few years, then people are going to struggle"
“This means that buyers can borrow less which means they can’t offer as much as they could a couple of years ago.”
Even with this predicted drop, property prices are so high in London that homeowners and first-time buyers “clearly need mortgage rates to get cheaper to open up the market” said Strutt.
“Mortgage lenders have been very busy improving their rates recently and there are now five-year fixes available from 4.43 per cent,” he explained.
“This is a lot cheaper than it was a few months ago and show rates are heading in the right direction.
“If the average rate is 5 per cent over the next few years, then people are going to struggle, but it will mean best buy mortgage rates for new borrowers will be much cheaper as the lenders fight it out to issue more mortgages.”
Falling transactions make for a triple threat
Another economic issue flagged by the OBR is the drop in property transactions as buyers and sellers are squeezed by affordability concerns.
“There is less stock on the market and fewer transactions happening. Both these things are probably propping up prices which would slip further if significantly more properties become available,” said Pryor.
“In summary, sellers think it’s 2021. Buyers think it’s 2009.”
The OBR predicts that housing transactions will fall 6.9 per cent in 2024, a forecast Strutt described as “quite worrying”.
“Overall lending figures are massively down in London and many of the big mortgage providers are miles off hitting their lending targets,” he said.
“Many people hoped the Chancellor would have done much more in the Autumn Statement to support the property and mortgage markets. There was very little that was going to make a difference to people, especially in London.”
While the Government announced this week that it would extend its mortgage guarantee scheme and temporarily unfreeze housing benefits, there was no change to stamp duty schemes aimed at homeowners or first-time buyers.
