The UK housing market has faced a period of significant headwinds, with elevated mortgage rates, a sluggish economy, and a cost-of-living crisis all contributing towards a gloomy picture. Indeed, the most recent official data released by the Land Registry are particularly notable, demonstrating that average UK house prices fell by 2.1% on an annual basis in November 2023, their largest year-on-year contraction in over a decade [1]. In real terms, considering inflation, this fall is greater at 5.8%.
On a regional basis, the annual falls are larger if you live in London, which experienced an annual decline of 6.0% in November (in nominal terms) – its most significant drop since August 2009, when the financial crisis was still raging. Notably, London prices have fallen for two consecutive months, representing a decrease of £26,023, or 4.9% from September’s average compared to the most recent figures for November. There is clearly a greater range of factors driving the decline in London prices compared to the wider UK market.
London has seen a post-pandemic shift in demand towards larger homes in greener spaces, often taking people further away from the centre of the capital. This has partially been driven by changes in working patterns, which have also impacted the demand for office space across the city.
This raises an interesting question: will these trends fuel an increase in residential conversions of commercial property within the capital? Such an influx of supply could potentially soften London’s historically robust housing market growth in the medium term. At present, this seems more of a risk than a reality, but changes to red tape following a change in government could accelerate any conversion process.
It may come as no surprise to learn that Cebr anticipates average UK house prices to fall by 1.9% on an annual basis in 2024 – economists are pessimists after all. Our forecasts are consistent with average prices in the UK housing market bottoming out at a near-term low of around £278,000 in Q3 2024 before undertaking a gradual recovery. This prediction translates to a peak-to-trough decline of 4.5% between Q4 2022 and Q3 2024. In real terms, the peak-to-trough change is 9.9%, based on our forecasts for inflation.
However, the outlook for the housing market in 2024 has been changing. Indeed, our forecasts reflect this, being upgraded in our previous two forecasting rounds, demonstrating growing confidence in the housing market.
This change largely stems from the faster-than-anticipated falls in mortgage rates. Two-year (75% LTV) fixed rates dropped to 4.7% in January 2024, according to Bank of England data [2], markedly down from their recent peak of 6.2% in July 2023. Mortgage providers appear bullish about the Bank of England’s projected interest rate reductions this year. Cebr expects the first cut in May, followed by others, bringing the base rate to 3.75% by year-end. We anticipate mortgage rates to continue trending downward but in moderation. This view stems from the consideration that future base rate movements may already be largely priced in by mortgage lenders, while the recent inflation uptick surprise could soften their sentiment towards further mortgage rate reductions. However, the existing drop in mortgage rates, coupled with our current forecast path, already offers encouraging signs for the housing market.
The above movement has already spurred increased activity. Despite remaining below the pre-pandemic average of 65,800 monthly approvals in 2019, approvals have risen for three consecutive months, reaching 50,500 in December 2023 [3]. Reflecting this movement, our 2024 forecasts predict a 25.9% increase in total UK mortgage approvals for house purchases compared to last year.
Focusing on more recent data, commercial House Price Indices (HPIs) offer quicker updates than official Land Registry statistics. While the latest Zoopla HPI still shows annual declines, it reveals a notable uptick in buyer demand and new sales at the beginning of 2024, reinforcing the trend of increasing activity [4].
A constricted housing supply has softened price falls and will continue to play a pivotal role in the fate of average UK house prices this year. New home registrations dropped by 44% in 2023 compared to the previous year [5]. Hence, the current trend in supply can largely be expected to continue. This is further reinforced by RICS survey data, in which there was a general trend of worsening supply across last year [6]. Although, it did show a positive net balance in the flow of new instructions to sell for the first time since March 2021 at the beginning of this year.
The future direction for the housing market outlook will likely depend on sustained real household income growth, a further easing in mortgage rates, and government policy. On the latter, demand-side policies likely to arise in the upcoming Spring Budget are changes to Lifetime ISAs, previously touted for the Autumn Budget. However, fundamental changes to increase the elasticity of housing supply would be more appropriate. Supply inelasticity has plagued the UK housing market for years. While tough to tackle, regulatory and planning reforms would be a start. Though, there is always a lagged effect with policy introduction.
The outlook for 2024 is still downbeat, but recent signs suggest potential stabilisation. Despite most economic variables currently fitting this narrative, the bulk of the broader downturn appears to be in the rear-view mirror.
[5] National House Building Council (NHBC)[6] RICS UK Residential Market Survey
For more information contact:
Cameron Misson, Economist
Email: cmisson@cebr.com, Phone: 020 7324 2873
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.