UK House Price Forecast 2022: prices to fall as mortgage costs rise
We have revised down our expectations for the sales markets but rental value forecasts have risen.
3 minutes to read
In this article we look at:
• Why house prices have been revised down
• How far house prices will fall across different areas
• Why rental value growth will strengthen
Inflation rising
Spiralling energy costs pushed inflation forecasts and interest rate expectations steadily higher this summer.
Following the government’s mini-Budget last month, there was a further jump as financial markets reacted negatively to the new government’s growth plans.
Interest rate hike
The five-year swap rate, which dictates the price of most fixed-rate mortgages in the UK, exceeded 5% in early October compared to less than 3% in early July when we last issued our house price forecasts.
At 2.25%, the current bank rate is also 100 basis points higher than it was three months ago.
As a result of this more adverse outlook for borrowers, we have revised down our forecasts for the next two years across all UK housing markets.
House prices to fall
We expect prices in the UK to fall by 5% next year and in 2024. This represents a total decline of almost 10% and takes house prices back to the same level as last summer.
Prices in the capital will be under more pressure next year due to higher loan-to-income ratios.
Prices have grown by around 23% since the onset of Covid, largely due to an imbalance between low supply and high demand. We expect the growth that took place during the second half of the pandemic will be reversed.
As supply and demand continue to normalise, the dominant theme of the next two years will be tighter budgets due to higher monthly interest bills.
Almost four million first-time buyer mortgages have been issued since the era of ultra-low rates began in 2009, underlining how many borrowers are not used to monthly repayments rising meaningfully.
At the same time, there is a political dimension to what is taking place.
Mini-budget impact
Since the government’s mini-budget on 23 September, swap rates have risen by around 1 percentage point as financial markets became concerned by higher levels of state debt.
The government will be keen to reverse this increase to improve its chances at the next general election, which must take place no later than January 2025. How it achieves this is something we discuss in more detail here.
We believe higher borrowing costs will reverberate up through the housing market and be felt in prime central London (PCL), where prices are expected to fall 3% next year before rising modestly in subsequent years.
The PCL market’s relative value compared to 2014 will still underpin an overdue recovery in the medium term.
Buyers and sellers in PCL will also be more insulated from rising rates due to higher levels of affluence and housing equity as well as a broader base of returning international buyers.
Similar declines are forecast for prime outer London (POL) and UK country house markets as the cost of finance rises. That said, the ‘escape to the country’ trend has not yet run its course and will support demand in both areas beyond 2023.
Rental Market
At the same time, we have revised up our forecast for rental values, as low supply continues to push rents higher. We forecast 15% growth in PCL this year and 12% in POL. Next year, we have revised up our forecast to 6% from 3.5% in both areas.
While new landlords may be proceeding with caution due to higher mortgage costs, we believe more accidental landlords may return to the lettings market as the sales market cools down. These are property owners who decide to let out their property after failing to sell for the asking price.
This should help more balanced conditions to return in the medium term in PCL and POL.
A high degree of fluidity on financial markets and inside the Conservative Party means we will revisit these numbers before the end of 2022.
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