In its latest House Price Index, property portal Zoopla reveals that average house prices in the UK are currently overvalued by 8%. This overvaluation is expected to decrease if mortgage rates fall in the near future.
Zoopla’s analysis measures actual house prices against an ‘affordable house price’ calculated using household incomes and mortgage rates. The methodology involves taking the average household disposable income from the Office for National Statistics, allocating 25% of it to mortgage repayments, and using average mortgage rates over a 28.8-year term to determine affordable mortgage amounts.
The report highlights that a spike in mortgage rates had caused house prices to be overvalued by 13% at the end of 2023. However, this figure has since declined to 8% in the first quarter of 2024. Zoopla forecasts that this overvaluation will disappear if house prices increase by 1.5% and mortgage rates remain steady at 4.5%.
Market activity in the first four weeks of May shows a resilient housing market, with new sales agreed up by 8%, demand increasing by 6%, and a 20% rise in homes for sale compared to a year ago. Despite an overall 19% increase in stock for sale, suggesting some properties might be overvalued, there are signs of seasonal slowdown with month-on-month declines in sales agreed, particularly in the North East (-6%) and West Midlands (-5%).
The report also notes that the annual rate of UK house price inflation has stabilized at 0% in May 2024, a recovery from a 1.3% decrease in November 2023. The average UK house price as of May 2024 stands at £264,900. While house prices in southern England are still experiencing annual declines, the rate is slowing. The Eastern region saw the largest decrease at -1.4%, followed by the South East at -1%, with Canterbury leading the falls at -4.1%. Conversely, Northern Ireland and the North West are seeing price increases, with Sunderland recording a notable 5.2% rise.
Looking ahead, Zoopla projects UK house prices to be 1.5% higher by the end of 2024, contingent on the fading of monthly price falls from the last half of 2023. Interest rates remain a crucial factor for the market’s trajectory this year.
Zoopla’s report states, “Any reductions in the base rate over the summer and into autumn will boost market sentiment and sales activity, although the impact on fixed-rate mortgages may be limited. Based on City forecasts, we expect mortgage rates to stay within the 4-4.5% range into 2024, which should support sales volumes and modest house price inflation.”
Nathan Emerson, CEO of Propertymark, remarked, “It’s encouraging to see confidence returning to the housing market despite challenges like high inflation and interest rates. With the General Election nearing, we anticipate the new government will focus on supporting homeowners and first-time buyers.”
Tom Bill, head of UK residential research at Knight Frank, added, “This Spring, house prices have been stable as buyers await the election results and the timing of the next rate cut. A new government will bring political stability in autumn, and even if the bank rate isn’t lower by then, a cut is expected soon. As mortgage rates gradually decrease with controlled services inflation, we predict UK house prices will rise by 3% this year.”