Homebuyers and sellers will continue to keep a keen eye on the property market this year to see whether house prices will rise or fall after a tumultuous 2023.
It can be difficult to know exactly what is expected, especially as experts are split on whether prices will see a dip or an increase following a drop last year.
The average UK house price increased by 0.7 per cent month on month in January to £257,656, according to data from Nationwide published on Tuesday, suggesting a “little more positive” outlook for the property market, although prices were still lower than a year earlier.
Others are also predicting rises, with estate agency Knight Frank suggesting a 3 per cent increase on average during the coming year.
However, most experts predict some falls during 2024 with the Centre for Economics and Business Research (CEBR) predicting a 2.4 per cent decline.
What happens depends on a multitude of factors. Below, we run through what experts say are the biggest factors in determining where prices go this year.
Mortgage rates
Mortgage rates are a key factor behind recent price falls. At the end of 2023, the average two-year mortgage fix was priced at 5.93 per cent – far higher than the 2.34 per cent average two years prior.
Higher mortgage rates mean that it costs far more to borrow than it used to.
Although mortgage rates are now falling slightly – and some people with large equity in their homes can get rates of below 4 per cent – they are still not going to come anywhere near rates seen during the pandemic.
Cameron Misson, an economist at CEBR, said the organisation was forecasting price falls because of the projected impact of high mortgage rates on affordability.
“These will negatively impact housing demand and, in turn, exert downward pressure on house prices. Indeed, while mortgage rates have eased recently, they remain significantly higher than before the Bank of England’s interest rate hikes,” he said.
Richard Donnell, executive director of the Zoopla property portal, said whether mortgage rates were above or below 5 per cent for a typical borrower – someone taking out a five-year-fix with a 25 per cent deposit – was generally the “tipping point” which determined whether house prices fell or grew.
He said with rates between 4 and 5 per cent – as is the case now – very low growth, possibly below inflation, would likely occur. Once rates went below 4 per cent, bigger increases could happen, adding rates above 6 per cent would lead to far bigger house price falls.
The economy and unemployment figures
In addition to mortgage rates, the condition of the economy – including unemployment numbers and pay growth figures – has a large impact on house prices, as it determines whether people have enough money to pay for homes.
If there is a large amount of unemployment, people are also more likely to have sell because they cannot afford their mortgages, which can increase supply, and decrease costs.
“The housing market is an extension of the economy,” explained Mr Donnell. “The labour market being strong and high immigration have supported the demand side for housing to buying and renting.”
Currently though, economic forecasts suggest fairly flat growth over the next year. Pay increases are running higher than inflation at 6.6 per cent annually towards the end of last year.
Although unemployment is expected to grow, economists said this will likely be a relatively small increase on current trajectories, with Stephen Millard of The National Institute of Economic and Social Research (NIESR) telling i there will likely be a “gentle” increase this year.
Mr Misson of CEBR explains that current forecasts suggest the economy is remaining resilient, which is why its forecast for price falls are not more dramatic.
“The continued resilience of household incomes amidst the cost-of-living crisis is a potential determinant for the prevailing direction of house prices in 2024. Consumer confidence has remained fairly upbeat, despite facing a number of economic headwinds,” he explains.
“The anticipated continued easing in inflation will contribute towards further real-term improvements in household incomes, and potentially aid the recovery in housing market activity.”
Government policies on housing and tax
“While housing affordability is relatively easy to model, sentiment is much more difficult to predict, being affected by factors such tax changes, housing policy and changing buyer demands,” said Lucian Cooke, head of residential research at Savills estate agency.
With a Budget coming in March, and a general election later this year, possible policy changes would include the likes of cuts to stamp duty – a tax charged on property purchases – as well as other moves that affect demand.
For example, it was recently reported that the Government was considering backing lenders to create 99 per cent loan to value (LTV) mortgages – involving deposits of just 1 per cent – to allow people to buy a home with a deposit of just a few thousand pounds. Experts warned this could push prices up by increasing the number of people able to buy.
Anna Clarke of the Housing Forum said: “As much as [these mortgages] can work at all, they can only do so by pushing prices higher.”
Longer term, policies that increase housing supply – such as large scale council house building – could also have an impact on prices, by either leading to reductions or limiting growth, though in the short-term, building on the scale that would change costs seems unlikely.
Mr Misson explained: “There was a general trend of worsening supply towards the end of 2023. Should this trend continue to prevail, it might help to soften any potential falls in house prices this year. However, it is worth noting that readings have generally become less downbeat, and supply was flat for the latest data. Improvements in supply would have the reverse effect, serving to dampen the outlook for house prices.”