UK Housing Market Forecast 2024

Housing Market Outlook 2024: Bracing for Further Turbulence Before a Gradual Recovery

The UK housing market faces a prolonged period of uncertainty as the economy grapples with financial instability. Prices look set to drop further in 2023 before recovering in 2024 if mortgage rates stabilise. But with recession threatening, the market remains vulnerable to negative surprises that could spark larger declines.

Turbulence takes hold amid economic headwinds

After over a decade of surging values, the property market shifted down a gear in 2022 in the face of mounting economic turmoil. As inflation hit double digits, interest rates spiked, recession risks rose and budgets got shredded by the cost of living crisis, buyer demand dried up.

Both mortgage approvals and transactions tumbled around 25% by mid-2022 relative to 2021’s frenzied activity, UK Finance revealed. Property website Zoopla also recorded a sharp slowdown in demand while RICS described sentiment as “moribund”.

Inevitably, prices came under pressure. Nationwide reported a 2% annual drop in November – the largest fall since 2012 barring a brief blip during the pandemic. Rightmove’s data also showed the average home taking over 60 days to sell and lingering longer on the market.

With affordability stretched further by each rate hike, a growing number of potential buyers have been priced out. And industry surveys indicate the worst is yet to come.

Bubble finally bursts in overheated southern market

Early signs suggest the South experienced the most dramatic shift in fortunes as its bubble finally burst after years of rampant growth. Regions like the South West, East Anglia, South East and London led the price boom coming into 2022.

But Nationwide’s figures showed these former hotspots declined between 2-5% over the past year as demand retreated – a markedly weaker trend than northern regions. The South West suffered the steepest fall at 5%, turning it from top performer to laggard in just 12 months.

By contrast, Wales and the North West bucked the downturn with modest price growth around 2%. This reflects ongoing urbanisation trends as buyers chase better affordability and yields outside southern cities. While the North may yet face seller resistance on pricing next year, stellar demand provides a cushion.

Mortgage misery to deepen house price declines

Most analysts expect housing woes to deepen in 2023 under the weight of higher borrowing costs, job losses and cratering confidence. This toxic mix threatens the first prolonged price decline since the 2008 financial crisis.

Lenders came under major stress in Q3 as volatile rates blew out funding costs, forcing many to temporarily withdraw products. While the market has stabilised recently allowing cheaper fixed deals to remerge, analysts believe mortgage rates are unlikely to fall significantly for at least 12-18 months.

So with the average 2-year fixed mortgage still hovering around 6% – triple the cost in 2019 – budgets will remain battered. Credit Suisse estimates every percentage point added cuts borrowing power by 10%, indicating current rates curtail first-time buyers by up to £50,000.

This is hammering buyer demand, evidenced in Halifax’s housing demand tracker plunging to its lowest level since 2008. With lending rules also tightened amid recession risks, transactions seem set to slide further. The silver lining is constraints may ease from 2024 onwards, aiding price recovery.

How far could prices fall during 2023?

In terms of house price forecasts, most analysts expect a peak-to-trough drop between 5-10% in 2023 followed by 1-2 years of meagre to zero growth. The gloomiest predictions such as Capital Economics’ -5 to -6% fall envisage an even sharper hit to real incomes and deeper economic scarring.

At the optimistic end, Savills and Rightmove believe prices may only shrink around 3% next year if mortgage rates stabilise and recession proves mild. Better news on inflation could also limit declines. But downside risks abound, including rising job losses.

At a regional level, Knight Frank believes major cities like London and Birmingham may experience steeper 8 to 10% price falls over 2023-24 as affordability bites hardest. But better value northern regions are expected to fare moderately better next year as the recovery gathers pace.

All eyes on Bank of England as recovery hopes emerge

Much depends on the Conservative government’s efforts to stabilise the UK economy and reduce inflation. After spending 2022 aggressively hiking rates, the Bank of England must carefully calibrate further moves to avoid recession while taming price growth.

BoE governor Andrew Bailey said in January he wants to gently nurse rates down to around 3% by 2024 to aid recovery. This ties in with economic consultancy Oxford Economics’ view that easier monetary policy from mid-2023 can help prices rebound. Falling rates would ease mortgage costs and release pent-up demand.

Green shoots may sprout for housing market by 2025

If the economy steers clear of a deep downturn, most analysts expect buyer interest to gently improve from 2024 onwards. Pent-up demand from first-time buyers unable to afford current deals may support the market once affordability improves.

Lloyds forecasts a 4.7% price decline across 2023 followed by -2.4% next year before growth resumes in 2025. Zoopla also believes the slide could peter out by end-2024 when mortgage rates hopefully fall close to 4.5%. This may open the path for a modest recovery phase.

Savills goes further stating 2025 could mark the start of a “steady climb” lasting years. Its modelling points to a £45,000 increase in the average UK house price by 2028 as the hangover fades. If true, the downturn may ultimately provide longer-term buying opportunities.

Are northern cities the best bets for 2024?

While risks seem skewed to the downside nationally, the North is tipped by many to lead the charge once market green shoots emerge. Redmayne Smith’s director highlighted “exceptional” demand across top-ranked cities like Manchester, Leeds and Liverpool where population and investment keep growing.

These urban hotspots look better placed to weather near-term uncertainty given their affordability buffer and strong rental yields near 7%. Redmayne Smith believes northern cities present rich pickings for investors even if some price softening occurs in 2023.

Estate agents Savills also views the North West as offering resilience with scope for greater price inflation during the next recovery phase.Regions like this may spring back faster given their discounts to London and South East.

So while the market looks set to face further pain before reforming, all cycles eventually turn. Patience may prove a virtue for willing buyers as the fog starts clearing from 2024 onwards.

Summary and Conclusion

• The UK housing market is entering a period of extended uncertainty amid rising recession risks and lingering affordability issues

• After over a decade of strong price inflation, the market shifted gears in 2022 as demand dried up
• Both prices and transactions have already started falling and are expected to decline further in 2023
• Most analysts forecast a 5-10% peak-to-trough drop nationally over 2023 before a gradual recovery ensues
• The South looks set to underperform next year after its bubble burst while parts of the North may prove more resilient
• A lot hinges on the Bank of England nursing rates down to aid recovery without sparking a deep recession
• If the economy avoids a major downturn, demand could start to regain momentum from 2024 onwards
• Pent-up first-time buyers may emerge to support prices when affordability improves potentially from mid-decade
• Northern urban hotspots like Manchester and Liverpool look well placed to lead the charge thanks to ongoing investment
• While risks loom large, forecasters hope the storm passes setting the stage for renewed growth by 2025

So in summary, further housing market weakness seems likely next year before a slow revival potentially develops, although much uncertainty persists around the economic outlook.