The cost of living squeeze and higher interest rates have overshadowed the housing market this year.  But according to new research from leading estate agency Hamptons, the average house price fall in 2023 as shown by the Office for National Statistics (ONS) House Price Index is set to be limited to 2.5%, partly since fewer homes have come up for sale than was feared.  Homeowners are postponing moves until the market’s mood improves and there are few forced sellers.  However, there has also been a change in the ONS methodology with a stronger weighting being given to houses rather than flats, which will artificially support average prices.

Aneisha Beveridge, head of residential research at Hamptons, is forecasting that prices will stop falling in 2024, as interest rates shift downwards and real incomes grow.  She adds: “A general election has to be held before January 2025. Once this would have made buyers nervous, but, after Brexit and post-pandemic, it seems people are more accustomed to political uncertainty. Additionally, both of the main parties seem to be fighting for the centre ground which limits the chance of radical change.”

As a result, prices are set to rebound in 2025, rising by 3%, with a further 5% increase in 2026, as London leads the way.  In fact, Hamptons predict that prices in London will rise by 11.5% over the next four years, more than twice the average for Great Britain. But the recovery in transaction numbers will be limited as the new normal for mortgage rates will be higher than in the past, pricing some would-be buyers out of the market.

Beveridge comments: “We argue that the current slowdown is more like the U-shaped downturn of the early 1990s than the V-shaped price crash in 2008, when property values plummeted, but then recovered sharply.”

In 2008, inflation was low. But this year’s inflation rate surge means that the drop in prices will be more painful than it seems. Beveridge comments: “In ‘real’ terms, that is taking inflation into account, it’s likely that average prices in Great Britain will have tumbled by nearly 10% between the start of 2023 and the end of 2024. The real terms fall for 2023 alone will be 7.4%.”

When the market begins to stage a comeback in 2024 and 2025, Hamptons forecasts that the recovery is likely to be driven by first-time buyers and upsizers. These are the two groups which have been held back by affordability and the soaring cost of borrowing.

Mary Beeton, head of residential sales at Hamptons, says that many households who were contemplating a move up the ladder this year are staying put.  In the meantime, they are proving to be more resilient than was predicted against a backdrop of steep rises in mortgage rates.

She comments: “The tough affordability tests that these homeowners had to pass when they applied for mortgages mean that they have been able to cope with bigger repayments and other bills.”

But Beeton points that “needs-based” transactions are still happening: “People are still moving because, say, they have another child, or want to be closer to schools.  In some cases, they are happy to accept a little less for the place they are selling because they can secure their next home at a reduction.”

Despite higher mortgage rates, some first-time buyers have been able to make the leap into home ownership.  But as Beeton points out, most have help from parents, grandparents and also siblings.

She expects these subsidies to become even more common, thanks to the nation’s substantial levels of housing equity: 54% of homeowners in England do not have a mortgage.  This has supported the market as interest rates have spiralled and should power its revival as confidence returns.