UK House Prices Set For A Steeper-Than-Expected Fall This Year

Knight Frank predicts that the struggling housing market market faces a steeper fall in prices this year than it previously forecast, despite tentative signs of improvement in the UK economy.

It said it now expected UK house prices to fall by an average of 7% this year, compared with the 5% fall it predicted previously. It expects prices to drop by a further 4% in 2024.

“The cost of borrowing has risen after an exceptional period that followed the global financial crisis, when rates hovered close to zero for more than a decade,” it said. “It’s a return to normality where the journey rather than the destination has been the problem. Anyone buying, selling or remortgaging a property in the last 18 months has faced market volatility caused by the mini-budget and inconsistent inflation data.”

Knight Frank’s 5-year house price forecast:

UK PCL POL Prime country
2023 -7.0% -3.0% -3.0% -7.0%
2024 -4.0% 0.0% 1.0% -3.0%
2025 4.0% 3.0% 2.5% 3.0%
2026 4.0% 4.0% 3.0% 4.0%
2027 5.0% 4.0% 3.0% 4.0%
5 Year Cumulative 1.4% 8.1% 6.5% 0.5%

Knight Frank think prime central London (PCL) will experience a smaller correction, due to a combination of more cash sales (around half inside zone 1), the fact prices are still more than 15% below their last peak in mid-2015 and the fuller return of international travel.

The agency has left its forecasts for PCL unchanged but expect a slightly smaller fall (-3% rather than -4%) this year in prime outer London (POL) and a marginally stronger recovery from 2026. POL continues to benefit from demand that is more domestic and needs-driven.

They expect prices in Country markets to fall by more than we expected in March, declining 7% this year rather than 5%. The main reason is that Country markets are coming down from a relatively higher point during the pandemic compared to London.

Prices in the Country had risen by 20% at their peak and even after a 7% decline this year, they would still be 6.7% higher compared to Q1 2020. They would also be 3.4% higher than their pre-pandemic level at the end of 2024 if there was a further 3% decline next year.

Rents

PCL POL UK Greater London
2023 8.0% 8.0% 6.5% 7.0%
2024 5.0% 4.5% 5.0% 5.5%
2025 3.0% 3.0% 3.5% 3.5%
2026 3.0% 3.0% 3.0% 3.0%
2027 3.0% 3.0% 2.5% 2.5%
5 Year Cumulative 23.9% 23.3% 22.2% 23.3%

Knight Frank forecast

In the rental market, Knight Frank think there will be stronger growth this year and next in PCL and POL as the imbalance between supply and demand takes more time to correct. The property firm highlights the fact that some landlords have left the sector in recent years due to the mounting tax burden and increased red tape.

Knight Frank says there is evidence the balance is correcting in the capital’s prime markets due to the discretionary nature of owners, some of whom have decided to let out their property due to the uncertain trajectory for prices.

As a result, the agency expect a 23.9% increase in rental values in PCL by 2027 and a 23.3% rise in POL.

Across the UK, annual growth for across the UK stood at 5.5% in August, according to the ONS, the highest rate since records began as the wider UK rental market grapples with the same supply-demand issues.

Demand for rented homes continues to be driven by multiple factors. The strength of the labour market and job creation is a key driver, as are higher mortgage rates, which are keeping more would-be buyers in the rented sector.

With the current supply-demand imbalance showing no sign of reversing, Knight Frank expect rental prices will continue to increase over the upcoming three months and have revised up our rental growth forecasts for 2023 to 6.5%, with a further 5% growth forecast in 2024.

Related news

UK house prices in September were 5.3% lower than a year earlier, matching their fall in August which was the biggest annual drop since 2009, figures from mortgage lender Nationwide showed on Monday.

In month-on-month terms, prices were unchanged in September after a 0.8% fall in August, Nationwide said.

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