According to Hamptons, if rates rise further than anticipated then house prices are likely to fall. The estate agent predicts house prices in 2023 will be equivalent to values in Q4 2022.
Hamptons expects the base rate to peak at 2.5 per cent next year, which it said would make mortgages “noticeably more expensive”. Inflation will also limit how much households can save and borrow which will force house prices downward.
Prices drops will be more prevalent in areas which have seen strong growth in recent years, such as the Midlands and regions in the North.
Extended completion times delay economic rate rise impact
Hamptons said the average 123-day wait between an agreed sale and completion would delay the impact of higher mortgage rates showing up on Office for National Statistics data until early 2023.
Because of this, the firm has pegged house price growth to stand at five per cent by the end of the year instead of its originally forecast 3.5 per cent. However, this will be significantly down on the 9.2 per cent annual growth seen at the end of last year.
Pressures to ease by 2025
Inflationary pressures on household incomes will ease by 2024 and the base rate will be lowered to around two per cent, which will improve affordability, Hamptons predicted.
By 2025, the base rate will “settle at a new normal of about 1.75 per cent”, resulting in rebounding activity from first-time buyers.
House price growth will be pegged at three per cent by the end of 2025, Hamptons said.
Transactions to level out at 1.3 million by 2025
Housing transactions will reach 1.25 million by the end of this year, a nine per cent rise on 2019, but moves will fall to 1.1 million in 2023 as fewer people move.
First-time buyers, who have accounted for 26 per cent of sales this year, will be most affected and transactions within this segment could drop to levels seen in 2013 and 2014.
Deals will recover in 2024 as people who delayed moves in 2023 push ahead with their plans. Hamptons predicts transactions will reach 1.2 million in 2024.
By 2025, housing transactions will total “a post-Covid normal” of 1.3 million.
Rental market to outperform housing sector
As landlords pass borrowing and other costs onto tenants, Hamptons has predicted that rental growth will hit six per cent this year outperforming house price growth.
However, this will slow to five per cent in 2023 and 2024, before falling further to four per cent in 2025, as the cost of living continues to put pressure on tenant incomes.
Lower yield landlords in London and the South East will be less able to absorb rising costs so may consider selling up, which will further support rental growth as stock is reduced.
All eyes on interest rates
Aneisha Beveridge, head of research at Hamptons, said: “The housing market has outperformed our expectations once again in 2022, but with a cocktail of risks on the horizon, growth is likely to stall next year.
“It’s unlikely we’ve seen the worst of it yet, with rates expected to peak at the beginning of 2023. This means price growth in the years running up to 2025 will add up to 2021 levels.”
She added: “All eyes are on interest rates as this will be the key determinant of house price growth in the coming years. Given many mortgaged homeowners won’t have witnessed interest rate rises, it will take time for them to adjust.
“While it’s likely that the base rate will remain lower than it has in the past, higher levels of mortgage debt will magnify the impact of even small rises. If mortgage rates surpass the five per cent mark, there’s a much stronger likelihood that house prices will fall.”
Fewer repossessions despite tough times
Beveridge added: “With more stringent affordability testing in place since the financial crash and a record share of outright homeowners, we’re likely to see fewer repossessions and forced sales which were a key driver of house price falls in 2008. Low-yielding landlords are the group most likely to sell up as they come under pressure from rising mortgage costs and new legislation.
“Longer-term, we expect the market to return to its traditional cycle. Price growth will begin to recover in 2024, with London leading the way as a new cycle dawns in 2025. However, stretched affordability will mean we’re likely to see considerably less price growth than in the past.”
