Are House Prices in the UK Dropping?

Are UK house prices in a downward spiral? Are the signs indicating a trend or just a temporary blip? These are questions many in the UK are asking. Are the prices we're seeing in the housing market indicative of a larger trend? The answer, it seems, is that house prices in the UK are indeed dropping.

In our recent House Price Index, there was an evident drop in house prices. This is the first time house prices have seen such a drop since 2012. The prices now are 0.5% lower than they were in September the previous year, bringing the average UK house price to £265,100. But what are the reasons behind this drop in prices?

House prices are directly impacted by various factors, and one of the significant factors is the mortgage rate. The power of the average mortgaged household in the UK to buy has decreased by 20% since the start of 2022. This is a significant factor in the dropping prices. We are anticipating the end of the year to show house prices that are 2% to 3% lower than at the start of 2023.

In certain areas, like the South East and East of England, the drop is even more pronounced. Prices in these areas are 1.5% lower than a year ago. However, there are places in the UK where house prices are not dropping. In regions like Scotland, the North of England, and Wales, house prices are still on the rise, albeit at a slower rate.

The question on everyone's mind is: why are these house prices dropping? The answer is multifaceted. The cost of obtaining a mortgage has risen, which has had a domino effect on house prices. The UK’s primary lenders have an average mortgage rate of 5.1% for a 5-year fix with a 75% loan-to-value ratio. This rate is higher than the 4.2% rate we saw in spring 2023.

This increase in mortgage rates means the average household in the UK has 20% less buying power than at the start of the year. With mortgages becoming more expensive, fewer buyers are in the market, leading sellers to drop their prices. As a result, the average discount to the asking price has risen to 4.2%, equating to £12,125 off the original price. This is a trend we haven't seen since March 2019.

However, it's essential to understand that while house prices are dropping in some areas, they aren't plummeting everywhere. The drops we're witnessing are modest, especially when compared to past economic downturns. Factors like the prevalence of fixed-rate mortgages, stringent affordability tests, and a strong job market are acting as a buffer, preventing house prices from dropping too drastically.

Looking ahead, we predict that house prices will continue to drop modestly throughout the end of the year and into 2024. If the current trends hold, by the end of 2023, house prices might be 2% to 3% lower than they were at the start of the year.

In conclusion, the UK housing market is experiencing a period of adjustment. While house prices are dropping in some areas, they remain steady in others. It's a complex picture, influenced by various factors, from mortgage rates to regional trends. Only time will tell how these trends will evolve, but for now, it's evident that house prices in the UK are dropping.