Will the UK house prices continue to fall?

Last week was quite important if you have a mortgage, especially a tracker mortgage. While interest rates remain significantly high, last week was the first time in almost a year and a half that the Bank of England (BOE) did not raise interest rates. The BOE has been raising interest rates to control inflation, which peaked at 11.1% exactly a year ago, way above its target of 2%.

There was more good news last week on inflation as figures showed that inflation fell to 6.7% from 6.8% the previous month, a modest decrease but a very important one. Most economists had forecast inflation to rise to 7% last month because of higher fuel costs, which didn't happen.

There was bad news on the economy, which probably swayed the BOE's decision to hold interest rates. The latest set of GDP figures showed that the UK economy contracted by 0.5% in the three months to July. The jobs market has started to cool down, with job listings falling by 0.8% and unemployment expected to reach 4.8% next year. If this trend continues, the BOE could be forced to cut interest rates sooner than most economists forecast, and this will likely start to happen in Q3 of next year, which should see the activity in the housing market begin to pick up. But do not expect significant housing activity until at least early 2025. 

How does this impact house prices?

As the property website Rightmove reported, all the above factors have translated into home sellers cutting the asking price at the highest rate in 12 years. The average two-year fixed mortgage is currently at 6.62%. It has almost tripled in the last two years, meaning people's affordability is stretched, and they can now afford smaller mortgages, translating into house price falls.

Nationwide reported that house prices fell by an average of 5.3% in August, the biggest annual drop since July 2009. This trend would likely have continued for much longer, but last week's figures were better news for the housing market as SWAP rates came down. 

How will interest rates influence house prices?

The impact of last week's interest rate hold was evident as the markets reacted positively, and SWAP rates started to fall. SWAP rates are rates at which banks lend each other money. The current SWAP rate for two and five years is currently at 4.9% and 4.4%, well below the BOE's base rate of 5.25%. Indicating that markets believe that interest rates will fall by the end of 2024. A week before these announcements, a two-year SWAP rate was at 5.5% and a five-year SWAP rate at 4.8%. Considerably higher than today (rates correct as of 27th September).

This has allowed banks to start cutting mortgage rates, with most big lenders like Nationwide, NatWest and TSB all announcing rate cuts.

What is the future of the housing market? 

The housing market's future is a little volatile in the short term, i.e., following 6-8 months, as prices will continue to fall by another 3% to 5%, meaning overall prices are likely to drop between 8% and 10% by early next year. Due to a combination of factors, the housing market activity will not start to pick up until at least Q3 of 2024.

The UK GDP over the coming months will continue to decline, and a recession is likely to follow. Wage growth will slow, and the unemployment rate will increase to 5% as businesses start holding investments and controlling costs. Inflation will come down close to 3.5%, still above the BOE's target of 2%, but due to the economy's poor performance, the BOE will have no option but to start cutting rates. Expect the first rate cut in Q3 of 2024. Economists and other forecasters are downplaying the impact of successive interest rate hikes over the last year and a half. The effects will become apparent from now, as 2.3 million households come to remortgage before the end of this year. But it will also not last as long as forecasters predict. It will be bumpy for a few months but expect early 2025 to be a turning point.