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House prices could drop 5% next year, warns Nationwide – what it means for buyers

HOUSE prices could drop by 5% next year experts have warned.

Nationwide’s annual forecast predicts that property values could drop after a turbulent end to the year for the housing market.

House prices have started to fall – and could continue dropping in 2023

The building society – one of the country’s biggest mortgage lenders – predicts prices are set to fall in 2023 as the property market cools.

The house price slowdown comes after political and economic turmoil following former Chancellor Kwasi Kwarteng’s mini-Budget.

It pushed mortgage rates up to a 14-year high in September, though they have since fallen back slightly.

Higher energy bills and food prices are also squeezing incomes making it harder to get a home loan.

Robert Gardner, chief economist at Nationwide, said the housing market was “remarkably resilient” until the “major shock” of the mini-Budget.

He said: “The number of mortgage applications slumped towards the lows seen at the start of the pandemic as a spike in long-term interest rates quickly fed through to mortgage rates and fundamentally changed the affordability dynamic for prospective buyers.”

He said that while financial market conditions have now settled again, with long term interest rates returning to the levels seen before the mini-Budget, mortgages could take longer.

He said: “Mortgage rates are taking longer to normalise and activity levels in the housing market have shown few signs of recovery and house prices saw three successive monthly declines since September – the worst run since 2008.”

Pressure on incomes and higher interest rates next year as well as a shrinking economy are expected to make it hard for the market to gain momentum again, he added.

Other banks have also predicted a drop, with major bank Halifax estimating an 8% fall next year.

The banking group owns Lloyds, Halifax and Bank of Scotland and is the UK’s biggest mortgage lender.

But if inflation improves and interest rates stabilise, Lloyds said house prices could fall just under 3%.

Of course it’s worth noting that predictions are just that, and that no one can say for sure.

What’s happening with house prices?

The Bank of England (BoE) has hiked rates to tackle soaring inflation this year, pushing up mortgage rates too.

Last week, BoE raised interest rates to 3.5%, their highest level in 14 years, and experts believe they will rise again next year peaking at around 4.5%.

Higher mortgage rates and tougher borrowing usually dampen demand which means the market cools – with house prices growing at a slower rate or falling.

Between January and August, the average UK house price increased by almost £20,000, from £255,556 to £273,751, according to Nationwide.

But the average house price in November was £263,788 it said – a fall of 1.4% and the biggest monthly drop since June 2020.

There are several different measures of house prices, and the building society’s index is not the only one starting to show a slowdown.

Halifax bank’s index showed house prices fell 2.3% from October to November – the biggest monthly drop in a decade.

And annual house price growth slowed to 4.7% in November, down from 8.2% in the previous month..

Meanwhile, Rightmove said the average home price fell by more than £4,000 in November compared to October – a 1.1% month-on-month drop.

The Office for National Statistics (ONS) said UK house prices were level between August and September this year.

What does it mean for buyers?

Falling house prices could sound like good news for first-time buyers, as it means they are not rising out of reach.

But as mortgage rates are going up too and incomes are squeezed, it could make getting a mortgage harder.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “The uncertain atmosphere will have made many would-be first time buyers think twice before taking the plunge.

“Will they be better off waiting in the hope of a fall in house prices or do they risk repayments rising and making their dream home unaffordable – it’s a tricky balancing act.

“It’s a nasty mix of circumstances that will be off-putting to many first-time buyers.”

She added: “If we see a relatively soft landing for house prices in the coming months then this may tempt more people back into the market but for the moment many are likely to hang back to see what the coming months bring.”

Homeowners are likely to see a drop in the value of their home, raising fears of households falling into negative equity.

This is when a house or flat is worth less than when you took out a mortgage on it.

But because prices have gone up so much in recent years, this probably won’t be the case.

Despite recent drops in house prices, year-on-year they’re still up.

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