What will happen to property prices?

The mortgage market is certainly enduring a tough time and that looks almost certain to continue into 2023.

Mortgage rates are expected to rise and house prices are anticipated to fall over the course of the next year, as lenders’ affordability criteria becomes stricter and prevents more borrowers from accessing the property ladder.

“One of the big questions on everyone's lips right now is what will happen to house prices in the wake of rising mortgage rates and reducing affordability,” said Theo Brewer, director of innovation at property valuation and data provider, Hometrack.

“Overall, I think that the higher mortgage rates will dampen activity at least through Q4 and if the rates stay high, I do not expect prices to continue rising and in all likelihood, I believe they will start to fall during 2023.”

Buoyed by stimulus packages and the search for space, the housing market in the UK had grown significantly, said Brewer (pictured). Despite the current challenges, year-on-year prices were more than 9% up, but he envisaged reductions in the asking price for properties.

“With fewer buyers in the market as a result of reduced affordability and their own uncertainty of the future, there will be fewer instances of bidding wars and that strong growth will soon dissipate,” Brewer added.

Read more: What's going on with UK house prices?

Market outlook

Since the mini budget on the September 23, Brewer explained that two-year fixed rates were up from 4.75% to over 6%, a third of mortgage products had reportedly been removed from the market and the energy cost crisis continued to hit UK household budgets hard.

As a result, residential mortgage affordability had weakened and Brewer expected to see a drop in the number of buyers in the market. He also said that anyone looking to refinance their existing deals would face increased monthly costs.

Read more: UK mortgage lending to be lowest in over a decade - EY

While he estimated that around eight million homes would now qualify for stamp duty relief, which was announced in the mini budget, he believed the savings versus the additional costs through mortgage rates would not favour borrowers.

Brewer said the relief had been designed to stimulate growth and activity in the housing market by effectively enabling tax savings of up to £2,500 for movers and up to £8,750 for first-time buyers, although this would be negated by additional borrowing costs.

“There has also been some conjecture that the weakening pound may attract overseas investment,” he added. “If this is the case, we expect it to support certain localised property markets particularly in London and the Southeast, which are already the population destinations for overseas investment.”

However, Brewer believed it was very unlikely to benefit the market and have any meaningful national effect.

Importance of valuations

With the complications of potentially falling house prices, Brewer explained that accurate valuations were of the upmost importance during this time in order to avoid further difficulties down the line.

Whether house prices rose or fell was uncontrollable, Brewer said. Valuation models needed to continue to perform reliably and accurately.

According to Brewer, detailed monitoring of market data and valuation performance was key, as well as being ready for both reactive and proactive enhancements when the market started to move.

“As we did during the Global Financial Crisis and COVID-19, real-time monitoring of the latest data, transparency with customers and preparing for a variety of scenarios, is the best way to approach this,” he said.