The housing market in the United Kingdom has witnessed its first annual price drop since June 2012, as per fresh market research released on Thursday. Zoopla’s House Price Index for September revealed a 0.5% decrease in house prices over the past year.
Regional disparities were notable, with Scotland bucking the trend with a 1.6% increase in prices, while the southeast and east of England experienced a 1.5% decline.
Despite this downturn, buyer demand showed remarkable resilience, surging by 12% since the August bank holiday weekend. This surge brought demand levels in line with those seen in 2019 but remained 33% below the figures recorded in the previous year.
The resurgence in buyer interest has been attributed in part to seasonal behaviour and growing consumer confidence, driven by anticipated reductions in mortgage rates. Interestingly, the south of England, which had lagged in terms of inquiries for most of 2023, experienced a particularly sharp increase in buyer interest.
However, the spectre of high mortgage rates, currently hovering above 5%, has eroded household buying power by 20% compared to early 2022. Despite this impact on affordability, there have been no significant shifts in buyer preferences, whether in terms of property type or price range. Many prospective buyers are adopting a wait-and-see approach, hoping for further price reductions or more favourable mortgage rates.
Consequently, the number of agreed sales for the year is projected to be 20% lower than the previous year, with mortgaged sales down by a substantial 28%. Regarding house price projections, Zoopla anticipates a year-end figure 2% to 3% lower than the start of 2023, leaving house prices still 17% above pre-pandemic levels from 2020.
Zoopla’s analysis suggests that the modest price reductions witnessed recently are unlikely to significantly boost affordability or revitalize property sale volumes, even if mortgage rates were to drop below the 5% mark. Nevertheless, on the mortgage front, improved inflation news and a halt in Bank Rate increases are offering a glimmer of hope for future borrowing costs.
A decrease in the finance cost to banks for fixed-rate lending indicates the potential for mortgage rate reductions. Currently, a five-year fixed mortgage with a 75% loan-to-value stands at 5.1%, but Zoopla forecasts that these rates will gradually decline, settling below 5% in the coming weeks.
The current housing market is decidedly favourable for buyers, with a substantial 80% increase in homes available for purchase compared to September 2021. This abundance has empowered buyers to negotiate more aggressively, resulting in an average discount of 4.2%, equivalent to £12,125, off the original asking prices. This represents the most significant average discount observed since March 2019, with London and the southeast offering the most substantial reductions, averaging 4.8% off asking prices, while the rest of the UK averaged a 2.8% discount.
Zoopla’s Executive Director of Research, Richard Donnell, commented on the evolving housing market, stating, “The housing market continues to adjust to higher borrowing costs. Mortgage rates have more than doubled since 2021, which, together with increased costs of living, represents a big adjustment for home buyers and the wider housing market. The impact on house prices has been small compared to how much buyer power has been hit.”
Donnell highlighted the role of lender forbearance, stringent mortgage regulations, and a robust labour market in mitigating the stress, pointing out that previous economic cycles under similar conditions saw more significant house price declines.
Despite lower buyer demand, the number of sales in the market is on track to reach one million in 2023, which is still a fifth lower than in 2022. Donnell explained, “This number is tracking above 2019 levels despite lower buyer demand. It’s evidence that there are still buyers who are serious about moving, though they’re fewer in number. Some buyers are returning to the housing market this autumn having delayed their move while the Bank Rate moved higher.”
Richard Donnell added that many others were awaiting the outlook for mortgage rates as they maintained their requirements for their next property. “The quicker mortgage rates move towards 4.5% or lower for a five-year, 75% loan-to-value fixed rate, the sooner buyers will return to the housing market – this seems more likely to happen in 2024 than in 2023. Lower mortgage rates do not mean house prices will start to rise but – importantly – they support sales volumes and market liquidity. House prices need to fall more in the most unaffordable parts of the country to boost buyer power and open up the housing market to more people.”