Experts predict housing market will cool in 2023 as UK enters a recession (2024)

The housing market will cool sharply next year after a bumpy 2022, industry experts are predicting, as the UK contends with recession and higher mortgage rates.

As the cost of living crisis has intensified amid soaring inflation and as interest rates have increased, house prices have already started falling month-on-month. The average house price dropped 2.3% in November from October – the most since the start of the financial crash in 2008 – according to Halifax.

The slowdown is expected to intensify, with all housing indicators flashing red as rates are poised to go higher and the UK enters a long recession.

The Bank of England is expected to continue to raise interest rates into 2023 from 3.5% now to a peak of about 4.75%, further dampening demand from buyers.

Property experts say this is likely to result in property price declines of between 5% and 12% next year, although some warn that in a worst-case scenario, they could crash by 15% to 20%. The latest data from the Office for National Statistics showed house prices were up by 12.6% in the year to October.

Kwasi Kwarteng’s disastrous mini-budget in September sent mortgage rates rocketing to above 6%, a level last seen in 2008. Mortgage rates have since fallen back with the average five-year fix at 5.6% according to Moneyfacts, but are still much higher than a year ago.

British banks and building societies expect to lend 23% less to homebuyers next year, taking mortgage volumes back to their level before the pandemic – and ending a two-year boom that lifted house prices by more than a quarter.

Trade body UK Finance has forecast that gross mortgage lending for house purchases will fall to £131bn in 2023 from £171bn this year and a peak of £189bn in 2021, when the market was fuelled by a stamp duty holiday. Property sales are set to drop to 1.01m next year from 1.27m in 2022.

The property firm Savills is predicting an even sharper drop in transactions, to 870,000, and a 10% drop in house prices in 2023, similar to buying agent Henry Pryor. “A slide, not a crash,” he said. “The housing market is like a supertanker; it takes ages to turn, change direction or change speed.”

The real estate firm Jones Lang LaSalle is forecasting a 6% drop in house prices next year, arguing that house price crashes have been rare in the UK. Both it and Savills expect a recovery to 1% price growth in 2024, as interest rates fall back and inflation is contained.

Robert Gardner, chief economist at Nationwide, expects a “modest decline” in house prices next year. “There’s good reason to believe that we can still achieve a soft landing.” He said that while the unemployment rate is likely to rise to about 5% from 3.7% now, this would still be low by historical standards, and could be partly due to people who are currently “inactive” rejoining the jobs market amid the cost of living squeeze, rather than massive layoffs.

Gardner noted that about 85% of mortgage balances are on fixed interest rates, and said even homeowners who have to refinance in the near term have had affordability testing at higher interest rates. “It’s going to be really difficult but the vast majority of people should be able to cope with it.”

The Bank of England has warned that 4m households face higher mortgage payments next year, with the typical payment going up by £250 to £1,000 a month. This would cause severe financial difficulties for 220,000 households.

Capital Economics’ central forecast is for house prices to fall by 12% by the end of 2023, but Andrew Wishart, senior economist at the consultancy, said in a worst-case scenario prices could plummet by up to 20%. “The initial drop in house prices has been sharper than in the financial crisis or the early 90s.

“For affordability to return to a sustainable level by the end of 2023, when we think mortgage rates will still be around 5%, the average house price would have to drop by 20%. On the other hand, were market and mortgage interest rates to drop faster than we expect, that would limit the fall in prices.”

The picture is different in the private rental market, where rent prices have surged to record levels amid a shortage of properties to rent and growing demand, partly because some would-be first-time buyers are continuing to rent in the hope of lower mortgage rates next year. Official figures showed UK private rents rising by 4% in November, the highest since records began in 2016.

Wishart thinks rental growth will be about double the average experienced in the pre-pandemic decade over the next five years, peaking at 5.1% next year. Savills sees rental growth rising even higher, to 6.5% before slowing to 4% in 2024.