House prices set to fall 5% next year says Zoopla as price inflation falls to 7.8%

Home prices rose 7.8 percent in October, according to Zoopla’s latest home price index, as the real estate site predicts they will fall 5 percent next year.

It represents a slowdown in growth compared to last month, when Zoopla reported that home prices were up 8.1 percent year-to-date.

Quarter-on-quarter house price growth slowed to 0.7 percent in November, the lowest rate since February 2020.

Despite a marked change in market sentiment, none of the major cities or regions have recorded price declines over the past three months.

Price growth was impacted by September’s ill-fated mini-budget, which saw mortgage rates rise sharply as the cost of borrowing rose due to a sell-off in government bonds – also known as gilts.

Since then, the market has been in constant motion. In October, the average mortgage interest rate with a term of two and five years reached a recent peak of 6.65 percent and 6.51 percent, respectively.

And while rates are now steadily falling, buyer demand is down 44 percent after the tax statement.

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“There’s a big wait-and-see trend right now,” said Matt Coulson, mortgage advisor at Heron Financial. “What you often find is with the procurement market, once you get to December 1st, it does cool down and I think we saw that a month earlier this year.”

New sales are also down, according to Zoopla, by 28 percent compared to the same time last year, mainly due to the rise in mortgage rates.

The outlook for 2023 assumes that mortgage rates will fall to 4-5%, leading to a 5% drop in house prices.

This means that 5-year fixed-term mortgage rates are likely to start in 2023 at or just below 5 percent, a much better position for the outlook for the housing market than current rates above 6 percent.

But compared to where rates were last year and earlier in 2022, it still represents a significant increase in purchase costs for the 7 in 10 households using mortgages.

House price falling: what are the forecasts?

Zoopla’s house price forecast is softer than some others’ estimates.

According to the Office of Budget Responsibility, house prices will fall by about 9 percent between the end of this year and September 2024. The change, it says, will come as a result of rising mortgage rates and tougher economic conditions.

Other analysts previously predicted declines of up to 30 percent over the next two years.

Price drops make sellers less likely to meet the asking price for their properties.

The strength of the post-pandemic market has forced buyers to pay an average of 100 percent of the asking price or higher in some cases for much of the past two years.

The average discount needed to make a sale has risen to 3 percent in recent weeks.

Zoopla expects average discounts to increase further as “we move into a more buyer’s market.”

Richard Donnell, executive director of research at Zoopla, said: ‘We still expect house prices to fall to 5% by 2023 with 1 million sales and mortgage rates falling below 5%.

“However, the number of sales will remain stable due to a number of structural, demographic and economic factors.”

The analysis shows that the sharp increase in house prices has given buyers more room to negotiate about the asking price. The outlook for 2023 will depend on sellers’ willingness to adjust asking prices to what buyers are willing to pay.

Zoopla added: ‘We don’t see any evidence of foreclosures or the need for a major double-digit reset in UK house prices in 2023’

At the same time, the decline in demand and sales, and the fact that more homes are coming onto the market, means that the stock of owner-occupied homes continues to grow, albeit from a low level. Last month, the average real estate agency had 23 homes for sale.

This is the highest since January 2021, but nearly a fifth lower than pre-pandemic levels.