UK’s housing market is past ‘peak pain���

Mainstream house prices:

• Mainstream house prices expected to bottom out in 2024, falling by a modest -3% as borrowing cost pressures begin to ease in the second half of the year
• Five year (2024-2028) growth forecast to total 17.9% – equivalent to a £45,521 gain on the average home by the end of the forecast period, as the average cost of mortgage debt falls back towards 3%
• Wales and the North East to see the strongest price growth over the next five years as we come to the end of the current cycle of regional price growth

Prime (broadly top 5-10%) house price recovery to begin sooner:

• Prime Central London is the only market segment projected to avoid price falls in 2024 – but a long-awaited recovery will be slowed by domestic political uncertainty and higher tax environment
• Elsewhere in London, prime house prices forecast to fall -2.0% in 2024 due to greater mortgage dependency (albeit less than the -4.0% projection for the London mainstream average where affordability pressures will be more keenly felt)
• Prime regional house prices to fall just -1.5% in 2024 as turning point is likely to come sooner, with 18.6% growth forecast over the five year period
• But, London is forecast to lead both prime and mainstream house price growth again from 2028, driven by underlying population pressures and a stronger economic outlook

House price falls past ‘peak pain’

After a rollercoaster twelve months, the UK’s housing market is past ‘peak pain’ and looks set to bottom out in mid-2024, according to latest 5-year house price forecasts from property adviser, Savills.

The average UK house price is projected to fall by only -3.0% in 2024 as affordability pressures slowly ease, with the expectation that the Bank of England base rate will stand at 4.75% by the end of the year.  Less debt-dependent prime regional markets will be the first to recover, seeing falls of just -1.5% in 2024.

Values held up slightly better than expected in 2023, according to Savills, as mortgage markets settled over spring and autumn months. Taking into account the current rate of falls, Savills has forecast that annual falls will stand at -4.0% by the end of the year, which will leave values down a total of -7.0% since the autumn of 2022 to the end of 2023.

Prime Central London (PCL) is expected to see the least downward pressure on prices next year, given much less reliance on mortgage debt and the relative value on offer to a range of wealthy domestic and international buyers. Prices remain -19% below their 2014 peak in this rarefied sub-market, although the prospect of a general election is expected to push out the timing of a recovery. Based on the £4.7 million average value in the Savills PCL index, the average prime central London property could see a gain of £800,000 over the forecast period.

Transaction expectations

Cash buyers have remained the most resilient buyer group over the past year, with activity 3.5% higher than the 2017-19 average. However, less activity among mortgaged buyers – most notably buy-to-let investors – means overall transactions are expected to end this year-20% down on 2022. 

Transactions are expected to remain at around 1 million in 2024, rising to 1.16 million at the end of the forecast period, as mortgaged buyers gradually return to the market; slightly below a pre-pandemic norm of 1.2 million.

Mainstream: Five-year (2024-2028) price growth forecasts upgraded to 17.9%

The Bank of England is expected to start cutting rates in the second half of 2024, giving more capacity for price growth in the mainstream market from the end of next year. Savills has forecast that house prices will grow by an average 17.9% over the five years to 2028 taking the average house price to £300,108* by the end of the forecast period.

Lucian Cook, head of residential research at Savills, comments: “Interest rates are expected to have peaked and the worst of the house price falls look to be behind us, but the first cut to rates still looks to be some way off. This means continued affordability pressures are likely to result in further modest house price falls over the first half of 2024, resulting in a peak to trough house price adjustment in the order of -10%.

“The expectation of a gradual reduction in rates suggests a progressive restoration of buying power and steady recovery in demand. We expect growth to accelerate as affordability pressures ease, with the strongest growth forecast for 2027 when rates reach their long-term neutral level. From there we expect growth to settle at a rate broadly in line with income growth.”

Source: Savills Research using Oxford Economics and Nationwide* (Note: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate.)

Prime markets (top 5-10% of a given market by value) to respond more quickly to improved sentiment:

Prime central London is the only market projected to see values level off in 2024, with 3.5% price growth expected in 2025, rising to 6.0% in 2026 as the global economy picks up and any domestic political uncertainty surrounding the next general election dissipates, and 18.7% over the next five years. 

Frances McDonald, director of residential research at Savills, says: “We continue to expect prime central London to outperform most other UK residential markets over the next five years. With prime property values still well below historic peaks in central London, a recovery looks well overdue. Values are likely at or close to their nadir, though we expect the bounce to be much less aggressive than in previous cycles given a higher tax environment and greater scrutiny of sources of buyer wealth.”

Other parts of the prime market have been more impacted by higher debt costs, with values falling more in line with the mainstream, Savills says.  “But due to less reliance on mortgage debt, these markets are expected to respond more quickly to an uptick in sentiment than the mainstream average, with recovery projected from the middle of next year, pointing to a ‘buy’ opportunity for those with the means to transact,” says McDonald.   

Savills project falls of -2.0% across outer prime London and just -1.5% in the prime regional markets next year as a whole, with markets beyond the capital’s extended commuter belt expected to be the strongest performers. 

“The trends we have witnessed so far in 2023 are likely to continue into next year as debt-dependence drives market performance. As a result lower value prime markets of the Midlands and North of England, Scotland and Wales where affordability is less of an issue are forecast to outperform over the five years to 2028,” McDonald says.

Source: Savills Research (Note: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate.)

Regional variation – mainstream

According to Savills research, the UK housing market remains in the late stages of a typical housing market cycle. That suggests slightly greater house price falls in London and the South East in 2024 (where buyers continue to need bigger deposits and borrow more relative to their income) and the strongest overall price growth in Wales and the North East over the next five years. 

However, having regard to evidence from previous cycles, regional price growth is expected to reach an inflection point in 2028. From this point on, Savills expects that London will once again lead price growth across the UK, driven by greater underlying population pressure, and a stronger economic outlook.

Mainstream house price forecasts by region (2024-2028)

Source: Savills Research (Note: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate.)