Will house prices fall further? Here are three factors that will set the pace
The outlook for house prices remains negative as the impact of higher interest rates and inflation continues to rattle the market. But insiders are watching other factors that could determine the direction of prices as well.
One is the behaviour of potential buyers, who may be holding back to see if prices bottom out. Meanwhile, those with larger deposits are seeing improvements in rate offerings, which may draw out these buyers and further support prices. However, there remains a danger of rising defaults and forced sales, which could accelerate price declines.
David Hollingworth (pictured), associate director of communications at L&C Mortgages, said that activity in the housing market has reduced substantially as aspiring buyers readjust to where mortgage rates may settle and what that spells for affordability.
“Although the lack of supply of property to the market will help to support prices in the near term, the reduction in demand will mean that there is not the same level of competition for properties, which is now showing in the house price indices as a fall in prices,” said Hollingworth, who has more than 24 years’ experience in the mortgage market.
He believes that is likely to continue until potential movers can see where the new ‘normal’ for rates may be.
Fixed rates have fallen back slightly and Hollingworth believes that may well accelerate as lenders consider their pipelines for the new year.
“With lower fixed rates and the base rate peaking at a lower level, it could help to improve confidence and draw out buyers that put their search on pause,” he said.
Hollingworth said that first-time buyers will be eying the cost of their monthly payments carefully in a new, higher interest rate environment, but added they will also be aware that a fall in prices could help them.
“Many will no doubt be trying to call the bottom, but it still looks unlikely for prices to fall back to the same extent as they rocketed over the pandemic,” he said.
Relief in sight for those with larger deposits
One area of support for prices is the downward trend in rates for mortgage applicants with larger deposits.
Beth Smith, mortgage product manager at Coventry Building Society said the market has shown some signs of recovery and fixed rates for those with at least 25% as a deposit, or in equity, are now the right side of 6%.
“I do not think anybody anticipated the sudden spike we saw in October, but the rates on lower loan-to-value (LTV) mortgages are coming down slowly and it is likely that we will see a continued downward trajectory over time,” Smith added.
However, she believes it will be a long time before average fixed rates fall back to the lows seen in recent years.
Smith also added that the tide has not yet turned for higher LTVs, and said the back end of last year saw interest rates for 2-year fixed rates at 90% and 95% LTV nudge higher still.
Beware the domino effect of forced sales
Jon Halbert, mortgage and protection adviser at Ormskirk-based Key Financial Associates, warned that the impact of interest rates will drag down prices in more than one way. The rising cost of borrowing will force a growing number of homeowners to sell when they have to remortgage, exerting downward pressure on house prices.
“When people become desperate to sell and reduce the sale price of their home below that of the current market value, all the homes in the same street reduce in value to the same level,” he said.
He also expects to see repossessions rise, although he noted that if lenders relax their criteria around interest-only mortgages, many will be able to survive potential repossession.
What do you believe has kick started the decline in house prices? Let us know in the comments below.
