House prices will fall about 9 percent between the end of this year and September 2024, according to the Office for Budget Responsibility (OBR).
The turnaround, which follows a period of record highs, will be driven by rising mortgage rates and tougher economic conditions.
The OBR’s Fiscal and Economic Outlook report, released alongside the Chancellor’s Fall Statement, says average interest rates on outstanding mortgages will peak at 5 percent in the second half of 2024.
This is the highest average rate since 2008 and 1.8 percentage points above the peak the OBR predicted in its March forecast. The average rate will then fall slightly to 4.6 percent by 2028 when the forecast ends.
Ups and downs: The OBR has said house prices will fall 9% next year before rising again in 2026 and beyond
However, the forecast notes that because of the relatively large share of fixed-rate mortgages (about 83 percent in the second quarter of 2022 compared to just 51 percent in 2007), higher rates on new mortgages take time to move to market. averages
As the economy recovers, the OBR says that house prices will rise slightly faster than incomes starting in 2025 (about 2.6% per year) and the house price/earnings ratio will settle at about 7.
Forecasts are based on quarterly peak-to-trough measurements, which predict the highest and lowest house price growth numbers in each three-month period.
This is a slightly more optimistic prediction than real estate agency Savills, which has predicted that house prices will fall 10 percent next year before rising 1 percent in 2024.
As recently as May, the real estate broker forecast just a 1 percent drop in 2023, but the sharp rise in mortgage rates has led to a bleaker outlook.
Rising rates: Mortgage rates rose rapidly in the second half of the year, but are projected to decline over the next several years according to the OBR
However, the OBR added a caveat to its prediction, adding that “there is significant uncertainty about this forecast given the sensitivity of home prices to mortgage rates and recent volatility in bond yields that drive prices in the mortgage market.
In its financial years data, the OBR predicts that house prices will fall 4.2% in 2023-24 and 4.0% in 2024-25, before recovering to 2.1% growth in 2025-26.
House price growth fell to 9.5 percent in September from 13.1 percent in August, according to the latest ONS figures.
Where Are Mortgage Rates Headed?
Following the September mini-budget, gilt yields soared, raising the cost of borrowing for banks.
In response, lenders raised their own mortgage rates, making sure they weren’t locked in by the sharp rise in the cost of credit by passing it on to their customers.
Before the mini-budget on Friday, September 23, the average two-year fixed rate across all loan-to-value tranches was 4.74 percent and the five-year fixed rate was 4.75 percent, according to Moneyfacts.
Today they are 6.23 percent and 6.04 percent respectively. However, two-year and five-year fixed rates are down from last month’s high of 6.65 percent and 6.51 percent for the two- and five-year fixed rate averages.
Falling: Mortgage rates have continued to fall since mid-October with an average two-year fixed rate now at 6.23% across all LTVs according to Moneyfacts
And rates continue to fall. Skipton Building Society has now launched a three year fixed rate agreement at 60 per cent loan to value with a rate of 5.03 per cent.
The Co-operative Bank has a two-year fixed-rate mortgage at 80 percent LTV for 5.89 percent.
Higher mortgage rates and falling house prices are two of the trends that the OBR says will influence consumption and investment in the UK.
The current squeeze on real income and rising interest rates will also help push the economy into a recession that will last just over a year from the third quarter of 2022, he said.
In his fall statement, Hunt said his fiscal plan will mean the recession will be “shallower and shorter” than previously anticipated.
In a surprise move, Hunt announced that the stamp duty cut introduced by former Chancellor Kwasi Kwarteng in his ill-fated mini-budget in September is only temporary and will end on March 31, 2025.
Kwarteng had cut the house price threshold below which buyers do not have to pay stamp duty from £125,000 to £250,000.
It meant removals companies would save up to £2,500 and a further 200,000 home buyers each year would not pay stamp duty.
But today, he announced that the increase in tax relief will be phased out starting in the spring of next year.
Find out below how much stamp duty you would pay under the current system.
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