UK house prices: why are they falling so little?

UK house prices have been falling in recent months. According to the Nationwide Building Society, average UK house prices in September 2023 were 5.3% lower than in September 2022. This fall reflects the increasing cost of owning a home as mortgage rates have risen. The average standard variable rate mortgage was 3.61% in August 2021, 4.88% in August 2022 and 7.85% in August 2023. A two-year fixed rate mortgage with a 10% deposit had an interest rate of 2.48% in August 2021, 3.93% in August 2022 and 6.59% in August 2023. Thus over two years, mortgage rates have more than doubled. This has made house purchase less affordable and has dampened demand.

But do house prices simply reflect current affordability? Given the large increase in mortgage costs and the cost-of-living crisis, it might seem surprising that house prices have fallen so little. After all, from September 2019 to August 2023, the average UK house price rose by 27.1% (from £215 352 to £273 751). Since then it has fallen by only 5.8% (to £257 808 in September 2023). However, there are various factors that help to explain why house prices have not fallen considerably more.

The first is that 74% of borrowers are on fixed-rate mortgages and 96% of new mortgages since 2019 have been at fixed rates. More than half of people with fixed rates have not yet had to renew their mortgage since interest rates began rising in December 2021. These people, therefore, have not yet been affected by the rise in mortgage interest rates.

The second is that interest rates are expected to peak and then fall. Even though by December 2024 another 2 million households will have had to renew their mortgage, those taking out new longer-term fixed rates may find that rates are lower than those on offer today. This could help to reduce the downward effect on house prices.

The third is that rents continue to rise, partly in response to the higher mortgage rates paid by landlords. With the price of this substitute product rising, this acts as an incentive for existing homeowners not to sell and existing renters to buy, even though they are facing higher mortgage payments.

The fourth is that house prices do not necessarily reflect the overall market equilibrium. People selling may hold out for a better price, hoping that they will eventually attract a buyer. Houses thus are taking longer to sell. This creates a glut of houses at above-equilibrium prices, with fewer sales taking place. At the same time, these higher prices depress demand. People would rather wait for a fall in house prices than pay the current asking price. This creates more of a ‘buyers’ market’, with some sellers being forced to sell well below the asking price. According to Zoopla (see linked article below), the average selling price is 4.2% below the asking price – the highest since 2019. Nevertheless, with sellers holding out and with reduced sales, actual sale prices have fallen less than if markets cleared.

So will house prices continue to fall and will the rate of decline accelerate? This depends on confidence and affordability. With interest rates falling, confidence and affordability are likely to rise. This will help to arrest further price falls.

However, with large numbers of people still on low fixed rates but with these fixed terms ending over the coming months, for them interest rates will be higher and this could continue to have a dampening effect on demand. What is more, affordability is likely to rise only slowly and in the short term could fall further. Petrol and diesel prices remain high and home energy costs and food prices are still well above the levels of two years ago. Inflation generally is coming down only slowly. The higher prices plus a rising tax burden from fiscal drag¹ will continue to squeeze household budgets. This will reduce the size of deposits and the monthly payments that house purchasers can afford.

Over the longer term, house prices are set to rise again. Lower interest rates, rising real incomes again and a failure of house building to keep up with the growth in the number of people seeking to buy houses will all contribute to this. However, over the next few months, house prices are likely to continue falling. But just how much is difficult to predict. A lot will depend on expectations about house prices and incomes, how quickly inflation falls and how quickly the Bank of England reduces interest rates.

¹ With tax thresholds frozen, as people’s wages rise, so a higher proportion of their income is taxed and, for higher earners, a higher proportion is taxed at a higher rate. This automatically increases income tax as a proportion of income.

Articles

• House Price Index – September 2023

Zoopla, Richard Donnell (28/9/23)

• UK home sellers increase discounts to secure deals, Zoopla data shows

Financial Times, Joshua Oliver (28/9/23)

• Buyer’s market! House hunters bag £12k off average asking price, says Zoopla

This is Money, Jane Denton (28/9/23)

• House price growth remained weak in September

Nationwide HPI Reports (2/10/23)

• UK mortgage approvals hit six-month low as interest rates cool market

The Guardian, Phillip Inman (29/9/23)

• UK house prices are plummeting at the most rapid pace in over a decade

Euronews, Daniel Harper (2/10/23)

• House prices fall across all UK regions for first time since 2009

Financial Times, Valentina Romei (2/10/23)

• Will house prices fall in 2023?

The Times, Hannah Smith and Georgie Frost (4/10/23)

• First-time buyers in UK drop by a fifth as higher mortgage costs bite

The Guardian, Julia Kollewe (27/9/23)

• England worst place in developed world to find housing, says report

The Guardian, Robert Booth (5/10/23)

• UK homeowners face huge rise in payments when fixed-rate mortgages expire

The Guardian, Richard Partington (17/6/23)

• UK house prices: Where the cheapest areas to buy are, and how far prices could fall

i News, Zesha Saleem (29/9/23)

• Why are house prices falling?

Independent, Vicky Shaw (7/9/23)

Data

• UK House Price Index Statistical bulletins

ONS

• House Prices: Data & Resources

Nationwide Building Society

• Halifax House Price Index

Halifax

• Economic Data freely available online: 36. UK house prices

Economics Network

• Interest and exchange rates etc. (see Quoted household interest rates)

Bank of England

Questions