Lloyds’ base economic prediction sees house prices fall by 8% in 2023, a 17% in a ‘severe’ scenario

House prices are expected to fall by 8 percent next year, but could fall by as much as 17.9 percent, according to Lloyds Bank.

In its third quarter update, the lender outlined its home price expectations under various economic scenarios. In the best-case or “upside” scenario, prices fall by just 2.7 percent, compared to the base case of 7.9 percent and the “serious downside” of 17.9 percent.

The base case, which represents what the mortgage lender thinks is most likely to happen, would bring home prices back to roughly where they were by mid-2021.

Due to ‘serious negative’ conditions, house prices would continue to fall until 2026, with an average decline of 10 percent per year.

For this worst-case scenario to happen, inflation would need to rise to 14.3 percent next year. It now stands at 10.1 percent.

In a ‘downward’ situation, prices would fall by 12.9 percent next year and continue to fall until 2026 with an average price deflation of 5.5 percent over the period.

Lloyds, Britain’s largest mortgage lender, posted pre-tax profits of £1.5bn for July to September, which is below the average analyst forecast of £1.8bn provided by the bank and 26 per cent lower than £2 billion a year earlier.

The results were dented by a £668 million provision set aside to cover possible bad loans in the future, which it said reflected the deteriorating economic outlook.

Lloyds’ forecasts are in line with other estimates from analysts and banks. According to analysts at Capital Economics, house prices will fall by 12 percent by mid-2024, while Credit Suisse expects prices to fall by as much as 15 percent.

Andrew Goodwin, chief economist at Oxford Economics, says that based on the cost of mortgages, house prices are overvalued by up to 37 percent and prices are likely to fall by about 10 percent annually.

Return to mid-2021: House prices fall by 7.9% next year under Lloyds base scenario

Crash? Lloyd’s forecast sees house prices falling to 2026 in half of the scenarios

“Our new forecast will show a 10 percent decline in house prices year-on-year,” he told This is Money. “About 13 percent peak to trough over the next few years and compared to that mortgage affordability measure.”

Any decline in property prices comes after a period of rising house price inflation. Despite uncertain economic conditions, house price inflation reached 13.6 percent in August, according to the ONS, which predicts the average house price could reach £300,000 by the end of the year.

Prices are kept high by continued demand, although there are signs that activity is starting to slow down.

Homebuilder Barratt revealed in a trading update that average reservations for new homes were 181 per week, a third less than the 281 per week in the last full fiscal year.

Author Fred Harrison, who accurately predicted the last two house price declines, is sticking to his prediction of the house price crash in 2026.

Until then, Harrison thinks they will continue to rise, albeit not at the same rate as the past two years.

“I’ll stick with the cycle of house-end price increases in 2026,” Harrison told This is Money, “provided that Putin doesn’t launch a nuclear weapon — at that point, all bets are off.”

“There will be no crash, just a slowdown in the rate of increase from the rates achieved during the Covid period.”