UK House Prices Face 5% Dip Next Year on Mortgage Rate Rises

UK homeowners will need to get used to paying more for their mortgages, with the higher costs potentially triggering a property price fall of as much as 5% in 2023.

That drop in house prices would erase the past 8 months of price gains from the average UK home, according to a report from property portal Zoopla. London properties would face the biggest loss of value with 13 months of capital gains wiped out in this scenario, which would see mortgage rates hover around 4%.

“The year ahead hinges on the trajectory for mortgage rates, which impacts the buying power of households who are already facing higher living costs,” said Richard Donnell, executive director at Zoopla. “Homeowners wanting to sell in 2023 will need to be realistic on price and may have to forgo some of the pandemic price gains to achieve a sale.”

Some UK banks have been even gloomier in their outlook than Zoopla. Britain’s biggest mortgage lender Lloyds Banking Group Plc predicts a 7.9% fall in house prices next year, or even an 18% crash in values in its worst-case model.

UK mortgage rates have been close to peaks last seen in the 2008 financial crisis since former Prime Minister Liz Truss roiled markets with a failed economic plan last month. These stubborn rates are sharply slowing demand in the housing market, with borrowers looking to buy or refinance property also facing the burden of red-hot inflation that’s been running at a 40-year high.

The Bank of England said new mortgage approvals fell to 66,789 last month from 74,422 in August, in a sign the jump in repayment costs is cooling demand. The effective rate on new home loans rose 29 basis points to 2.84% during September, the biggest monthly increase since December 2021, when the BOE started a rate-increase cycle.

A recent rally in UK government bonds following Rishi Sunak’s appointment as prime minister has added some stability but Zoopla says home loan rates of 4% to 5% are set to become the new norm. In the unlikely event that mortgage rates stay above 6% for the majority of 2023, UK homeowners could witness double digit price falls, eroding gains achieved over the pandemic.

Still, a handful of major banks are more upbeat on UK house prices. Last week, Barclays Plc and HSBC Holdings Plc both predicted growth in 2023 despite market turbulence, while the chief financial officer of Banco Santander SA told Bloomberg that he does not expect significant drops in UK home values in the coming years.

“In the upcoming weeks and months the market will be driven by those who ‘need’ to buy or sell,” said Caroline Pattinson, managing director at UK-based Pattinson Estate Agents. “Those who would ‘like’ to buy or sell will sit back and wait for the dust to settle.”