Prospects for the UK Housing Market in 2024

The UK housing market has often proved resilient in the past, regularly confounding experts' forecasts. If we look back to the Brexit referendum as one example, many experts predicted property prices would fall off a cliff on the back of the result. While it would be misleading to suggest that Brexit has been a smooth transition, in fact, an ongoing project, house prices remained relatively resilient. So, as we come to the end of 2023, what can we expect for the housing market in 2024?

There are several factors to consider, such as the economy, interest rates, property prices and the ongoing cost of living crisis.

Economy

A recent economic update by the IMF has confirmed the thoughts of many; the UK economy will lag behind many of its European and developed economy counterparts. The following table puts this in context:-

While there were some encouraging announcements with the recent Autumn Statement, much of the benefit has been taken back by what is known as fiscal drag, a failure to increase tax allowances by inflation. Consequently, it looks as though the next couple of years will be challenging for the UK economy, but we are unlikely to experience a recession.

As we will cover in a moment, the threat of inflation has prompted the Bank of England to take an aggressive approach with interest rates.

Interest rates and inflation

Currently, UK interest rates stand at 5.25%, with inflation more than halving since peaking at 11.1% - standing at 4.6% in October. This is certainly encouraging news, but the recent fall, from 6.7% in September, was predominantly due to a drop in the energy price cap. There is a growing opinion that interest rates have peaked, although whether inflation will fall as quickly as many expect remains to be seen.?

Indeed, some experts are concerned about upward inflationary pressure in the short term, which could slow the eventual move to the Bank of England's target rate of 2%. Andrew Bailey, the Governor of the Bank of England, used a recent speech to suggest that inflation will continue to trend downwards but not at the rate seen in recent months. This has put paid to those hoping for a short-term reduction in UK interest rates - as we approach 2024, the year many believe will see a general election and potential change of government.

The consensus is that interest rates could start to fall towards the second half of 2024, perhaps as low as 4.5% in 2025. Savills, the property company, believes UK base rates will trend downwards to around 1.75% in 2027. So, where do we stand regarding house prices in the UK in 2024 and beyond?

Property prices

House prices are down 7.6% since the last price peak in 2022, with predictions of further short-term downside. The Office for Budget Responsibility (OBR) believes house prices will fall 4.7% in 2024 to an average of ￡266,000 or ￡511,000 in London. The latest forecast from Savill’s is broadly in line with the OBR, predicting further falls in 2024, 3% across the UK and 4% in London.

In the absence of a surprise spike in inflation, interest rates are not expected to rise in the short term. Even though the trend is downward, rates will likely remain relatively high for at least two years. This will limit the downside for mortgage rates and place further pressure on household incomes, unlikely to reach relative spending levels last seen in 2021 until 2027.

The knock-on effect will see a reduction in property transaction numbers, with the OBR predicting a fall of 6.9% in 2024. This will limit competition in the housing market, potentially placing further downward pressure on prices. Even though the UK government recently extended the mortgage guarantee scheme, there was a degree of disappointment that no further assistance, such as a stamp duty reduction, was announced.

Summary

We are in an unenviable situation where interest rates will likely remain relatively high in the short term to control inflation. With the UK economy expected to avoid a recession in 2024 and 2025, there is still concern about minimal growth. Even though historically, UK house prices have remained relatively robust during difficult times, the impact of inflation and interest rates on relative household spending power will impact mortgage affordability.

It looks like 2024 will be a challenging time for the UK housing market, and we will likely see an increase in mortgage defaults. However, the doomsday scenario of double-digit falls in house prices seems short of the mark.

If you are looking to purchase your first home, or perhaps your mortgage is up for renewal, please contact me, and we can discuss your situation in more detail.