House prices set to drop 5% next year, says Zoopla: Price inflation falls to 7.8% in October, driven by sharp rise in mortgage rates
- Mortgage rates are expected to fall back to 4-5% next year according to the real estate site
- Average asking price discount increased to 3%
- Demand plummeted 44% following September 23 mini-budget
- Buyers are using rapid price inflation over the past two years to negotiate lower
House prices rose 7.8% in October, according to the latest house price index from Zoopla, with the property site predicting they will fall 5% next year.
This represents a slowdown in growth from last month, when Zoopla reported that house prices rose 8.1% year-to-date.
Quarterly house price growth slowed to 0.7% in November, the lowest rate since February 2020.
However, despite a sharp shift in market sentiment, none of the major cities or regions have seen price declines over the past three months.
Slowdown: UK house price growth fell to 7.8% in October according to Zoopla
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 – known as of gilts.
Since then, the market has been in a state of almost constant flux. In October, the average two-year and five-year fixed mortgage rates reached recent highs of 6.65% and 6.51% respectively.
And while rates are now steadily falling, buyer demand fell 44% following the budget statement.
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“There’s a really big trend to wait and see right now,” says Matt Coulson, mortgage adviser at Heron Financial. “What you tend to see is with the buy market, as soon as you hit December 1st it cools off and I think we saw that a month earlier this year.”
According to Zoopla, new sales also fell 28% compared to the same period last year, mainly due to rising mortgage rates.
Its outlook for 2023 assumes that mortgage rates will fall back to 4-5%, which will lead to a 5% drop in house prices.
This means that 5-year fixed mortgage rates should start 2023 at or just below 5%, a much better position for the housing market outlook than current rates of over 6%.
Yet, compared to rates last year and earlier in 2022, this still represents a significant increase in purchase costs for the 7 in 10 households that use mortgages.
Down: Buyer demand fell 44% after September’s mini-budget
Falling real estate prices: what are the forecasts?
Zoopla’s house price forecast is more flexible than some others’ estimates.
According to the Office of Budget Responsibility, house prices will fall about 9% between the end of this year and September 2024. The change, it says, will be driven by rising mortgage rates and tougher economic conditions.
Other analysts have already predicted falls of up to 30% over the next two years.
Price declines mean that sellers are less likely to meet the asking price for their properties.
The strength of the post-pandemic market has forced buyers to pay, on average, 100% of the asking price or more on some occasions for much of the past two years.
The average discount required to make a sale has widened to 3% in recent weeks.
Zoopla expects average discounts to spread 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 decline by up to 5% in 2023 with 1 million sales and mortgage rates falling below 5%.
“But the number of pending sales will remain supported for a series of structural, demographic and economic factors.”
The analysis notes that strong house price growth has given buyers more room to negotiate the asking price. The outlook for 2023 will depend on sellers’ willingness to adjust asking prices based on what buyers are willing to pay.
Zoopla added: ‘We see no evidence of forced sales or the need for a large double digit reset in UK house prices in 2023’
At the same time, falling demand and sales, along with an increase in the number of homes on the market, mean that the inventory of homes for sale continues to grow, albeit from a low base. Last month, the average real estate agency had 23 homes for sale.
That’s the highest since January 2021, but nearly a fifth lower than pre-pandemic levels.
