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UK house prices set to fall in 2023 amid higher mortgage rates

House prices
Growth in UK house prices currently stands at 8.1% year-on-year, driven by the strength of demand and sales agreed over the last six months, and an ongoing shortage of supply. Photo: Getty

UK house prices could see 5% wiped off their average value next year, as higher mortgage rates send shockwaves into the sector.

According to Zoopla on Monday, the increase in mortgage rates represents the largest hike for new buyers since the late 1980s.

Despite signs of slowing, mortgage rates will not return to the ultra-low levels of recent years, the real estate company said, with 4-5% set to become the new norm.

It comes after the average two- and five-year fixed-rate mortgages surpassed 6% for the first time since 2008, after the former chancellor’s mini-budget last month. This hit buyer demand, which has fallen by a third since Kwasi Kwarteng’s announcements.

Sustained 6% mortgage rates “would lead to double digit price falls eroding paper gains achieved over the pandemic but few negative equity cases”, Zoopla said.

More likely is a reduction of up to 5% over the next year, meaning the average UK property would lose eight months of capital gains with London set to see the biggest loss of value and Wales the least, according to Zoopla.

Read more: How to cut the cost of moving house

Zoopla added that higher mortgage rates also do not hit all buyers equally. Half of all sales are typically paid for by cash, or using a mortgage that is small relative to the value of the property (<50%).

These buyers will see less of a hit to buying power than first-time buyers and those looking to trade up using larger loans.

House price growth currently stands at 8.1% year-on-year, driven by the strength of demand and sales agreed over the last six months, and an ongoing shortage of supply.

While there was a short-lived surge in the number of homes coming to the market, the number of homes for sale remains below average.

The drop in new buyer interest over the last month has been spread across all UK markets as limited buyers with cheap mortgage offers remain, with the biggest drops in new buyer interest in the South East (-40%) and in the West Midlands (-38%).

Falls in buyer interest are also evident in more affordable regions such as the North East (-20%) and Scotland (24%) but to a lesser extent.

Watch: Cost of living crisis: Thousands face higher mortgages for years after Liz Truss's 'disastrous premiership', Labour says

This also coincides with an increase in asking price reductions — almost 7% of homes have seen the asking price reduced by at least 5% — an increase in comparison to recent months, but still below 2018 levels.

In addition to this, sale fall-throughs are increasing. This is mainly as a result of a lack of affordable finance impacting buyer affordability.

However, the market is still on track for up to 1.3 million sales in 2022, down from 1.5 million in 2021.

Richard Donnell, executive director at Zoopla said: “New buyer demand has dropped quickly in the face of higher borrowing costs, it’s like the Christmas slowdown has come a month early.

“We don’t expect to see any impact on pricing levels between now and December and this will only start to materialise in early 2023. It takes several months for pricing to adjust in the face of weaker demand.

“The most likely outcome for 2023 is that we see a fall in mortgage rates towards 4% with a modest decline in house prices of up to 5%. The labour market remains strong and the supply of homes for sale is below average creating a scarcity of homes for sale that will support pricing.”

Read more: Property: 8 spooky homes for sale

It comes as the Office for National Statistics (ONS) revealed on Friday that half the number of people who have a mortgage have said they are worried about rising interest rates.

The data also showed that around a third of people who are renting or making mortgage payments have seen this go up in the last six months. As a result, a third admitted that they are finding it difficult to make these payments.

Santander said earlier in October that it had seen a 40% surge in people overpaying on their mortgage in the week following the mini-budget, in efforts to bring down their overall balance and monthly repayments.

Its financial support team also reported an influx in homeowners reaching out in advance of their fixed-rate mortgage deal coming to an end.

Watch: Will UK house prices ever fall?