Home prices in the UK will fall by 5% next year and in 2024 as rising interest rates and spiralling energy costs shrink household budgets, Knight Frank predicts.
The broker revised down its forecasts as the five-year swap rate, which dictates the price of most fixed-rate mortgages in the UK, exceeded 5% in early October compared with less than 3% in early July when it last issued forecasts.
At 2.25%, the current bank rate is also 100 basis points higher than it was three months ago, adding to the adverse outlook for borrowers across all UK housing markets, it said.
Prices have grown by around 23% since the onset of COVID, largely due to an imbalance between low supply and high demand. The growth that took place during the second half of the pandemic will be reversed as monthly repayments on the almost four million first-time buyer mortgages issued since the era of ultra-low rates began in 2009 rise meaningfully.
Since the government’s mini Budget on 23 September 23, swap rates have risen by around 1 percentage point as financial markets became concerned by higher levels of state debt. The government will need to reverse this increase to improve its chances at the next general election, which must take place no later than January 2025, Knight Frank warned.
It has revised up its forecast for rental values, as low supply continues to push rents higher. The broker forecast 15% growth in prime central London this year and 12% in prime outer London. For 2023 Knight Frank has revised up its forecast to 6% from 3.5% in both areas.