Are UK house prices falling in 2023?

With February 2023 figures now available for the Nationwide House Price Index, we can see that average annual house prices have fallen from a growth point of 1.1% in January 2023 to -1.1% a month later. This is the sixth monthly drop in a row, with an actual monthly house price decrease from January to February 2023 of 0.5% (£891 on average) and a 3.7% decrease from the August 2022 peak.

According to Nationwide, this means the average UK house price as of February 2023 is £257,406 in comparison to £260,230 in February 2022.

Tellingly, this is the first annual decline since June 2020 when we saw the start of the meteoric house price boom which resulted from the pandemic’s low interest rates and temporary reductions in stamp duty. February 2023 has also seen the weakest house price growth since November 2012 when the market was still getting back on its feet after the 2008 financial crisis.

This will come as little surprise to many within the property sector, who predicted a levelling off and decline in house prices in 2023 in response to a number of factors which had a huge impact on the UK economy in 2022.

Thanks to the cost of living crisis, affordability went out of the window in 2022 and inflation spiralled as we saw a hike in energy prices which was further exacerbated by the ongoing Russian invasion of Ukraine.

More recently, the impact of the ill thought out mini-budget from former Prime Minister Liz Truss and Chancellor Kwasi Kwarteng in September 2022 saw consumer confidence in the market tumble and mortgage rates hit a high of 6.65%. The annual rate of inflation climbed to 11.1% in October 2022, which was a 41-year high, and interest rates and mortgage repayments followed suit.

Whilst the financial market has, thankfully, stabilised somewhat since the final quarter of 2022, affordability remains a major issue and consumer confidence in the housing market remains subdued as average 2 and 5 year mortgage rates remain at 5.32% and 5%, around double what they were a year ago.

Perhaps unsurprisingly then, we have seen a marked decrease in the number of property transactions. According to HMRC, the property market is still feeling the effects of the mini budget and the number of house sales in February 2023 are 18% lower than in February 2022 and 4% lower than just a month earlier in January 2023, which makes these the worst February sales figures in 10 years.

Whilst asking prices are still rising slightly month on month according to Rightmove, with a 0.8% increase in March 2023, this is still less than the average monthly rise we have seen at this time of year over the last two decades. According to valuation specialists Yopa, this suggests that vendors are valuing their properties more cautiously than has been the case in the past few years as the reality of the impact of higher living costs on buyer affordability hits home.

What will happen in the rest of 2023 and beyond?

Whilst they may not agree on the extent to which house prices will fall, there is a consensus amongst

those in the know that we will see a fall in property prices this year and beyond thanks to the impact of inflation and higher mortgage rates.

As the UK housing market continues to play catch up after a dismal final quarter of 2022, we are likely to see similarly cautious sales volumes in the next month or two, particularly given the Bank of England’s most recent decision to increase the base rate to 4.25% – the 11^th consecutive rise and the highest interest rate in 14 years – after the cost of living rose more than anticipated last month. The Office for Budget Responsibility has suggested a fall in house prices of 10% to 2024, with Lloyds Bank predicting an 8% drop and Zoopla suggesting a more optimistic 5% fall in house prices by the end of 2023.

However, demand is still there thanks to a continued shortage of housing in the UK and we are now expected to avoid an anticipated recession this year. There are also expectations of a drop to an inflation rate of 2.9% by the end of 2023, which is much closer to the Bank of England’s preferred rate of 2%.

As such the volume of property sales is expected to increase in 2023 as our economic situation improves and lenders begin to offer more favourable rates for homebuyers. Going forward, Savills forecast a modest 1% house price growth in 2024 and an overall growth of 6.5% over the next 5 years.

Given that UK house prices have actually risen over 60% in the last 10 years (28% of which was during 2020-2022 alone) and are three times higher than they were in 2000, then the fall in house prices in 2023 could actually be considered less of a crash and more of a price correction.