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Savills has forecast a 10 percent drop in home prices next year, a significant cut from the one percent drop the real estate agency forecast in May.
Rising borrowing costs, driven in part by successive increases in the Bank of England’s base rate over the course of the year, will cause a market split between mainstream mortgage-backed properties and prime markets.
According to Savills, home prices in the mainstream market will take a bigger hit in 2023, dropping 10 percent over the course of the year before reaching 1 percent growth in 2024.
By the end of 2027, Savills expects prices to grow by 5.5 percent, slightly less than the 7.5 percent growth in 2026.
In its latest forecast in May, the brokerage firm had projected house prices to fall by just 1 percent in total next year, before making up for losses with a 1.5 percent rise in 2024.
Discrepancy: Average home prices could fall by 10% by 2023, Savills says, but key markets (regional top 10 to 15% of real estate) will see a less pronounced price decline
Prime markets are defined as generally the top 5-10 percent by value in any region and will see less depreciation next year and over a longer period of five years, according to Savills.
This is because buyers of these more expensive properties are less likely to depend on mortgages.
Outside of London, Savills said it expects prime properties to fall in value by 6.5 percent in 2023, but will increase in value by 10 percent by the end of 2027.
In the top market in central London, prices are expected to fall by 2 percent next year and rise by 13.5 percent by the end of 2027.
While grim, Savills’ latest predictions are less stern than others. Nationwide Chief Operating Officer Chris Rhodes told MPs that in the construction company’s worst-case scenario, home prices would fall by a third (about 30 percent), but in their base case, prices would fall by 8-10 percent in line with Savills.
In Nationwide’s latest home price index, Nationwide revealed that home prices fell for the first time this year in October, with the average home being worth 0.9 percent less in October than it was in September.
Decline: According to the latest forecast from Savills and Oxford Economics, average house prices on the second-hand market will fall by 10% in 2023, before flattening out over the next four years
Lucian Cook, Savills’ head of residential research, said: “The housing market has remained remarkably strong for the first nine months of 2022, but demand dynamics changed in the autumn with the realization that the Bank of England would need to move faster and further on inflation.
A new prime minister and a turnaround in fiscal policy appear to have eased pressure on interest rates somewhat, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets.
“That, combined with significant pressure on the cost of living, means we expect prices to fall by as much as 10 percent next year during a period of sharply reduced housing market activity.”
Cook added, however, that there were mitigating factors isolating the market from a larger fall in house prices.
Low unemployment rates and the increase in mortgage stress tests in recent months have reduced the chances of a more severe downturn, he said.
He further added that there was evidence that lenders wanted to work with existing borrowers to help them manage their household finances, which could reduce foreclosures.
However, a recovery in house prices after 2023 depends on interest rate cuts, according to Savills.
A one percent increase in house prices in 2024 will depend on the Bank of England’s key interest rate falling to 3.5 percent, while it is expected to hit 4 percent this year.
Looking ahead, Savills expects house prices to rise by 7 percent in 2026 if the key interest rate falls further to 1.75 percent.
The figures apply to homes on the second-hand market, not to new construction.
The key rate, set by the Bank of England’s Monetary Policy Committee, has been rising rapidly since December 2021, when it stood at just 0.1 percent. In September, the Bank raised interest rates to 2.25 percent in a bid to curb rising inflation and ease pressure on household finances.
In its most recent hike, the Bank raised the rate by 0.75 percent to 3 percent — the largest increase in 33 years.
However, the rise in interest rates has had a negative effect on mortgage holders as lenders have passed on the increase to borrowers.
The current average rate for a 2-year fixed mortgage across all deposit sizes is 6.46 percent, with the five-year average of 6.3 percent, according to Moneyfacts.
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