HOUSE prices could fall next year by 8% a major bank has warned.
Property prices have come under pressure after mortgage rates shot up following the disastrous mini-Budget, and amid rising inflation.
Higher rates make it harder to borrow money to buy a house and that can mean property prices go down as demand drops.
Lloyds Banking Group has said it expects house prices to fall by around 8% in 2023.
The banking group owns Lloyds, Halifax and Bank of Scotland and is the UK’s biggest mortgage lender.
In an update to its economic forecasts the bank said that it believes the Bank of England (BoE) base rate will reach 4% by the end of the year.
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The BoE base rate is used by high street banks to set their own interest rates for customers on things like credit cards, loans and mortgages.
The base rate has increased seven times in a row since December last year, when it was at a historic low of 0.1%.
The base rate is currently 2.25% and is expected to rise again next week.
The Bank of England meets every six weeks to decide if the rate should change or not.
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It has been increasing rates as a way to tackle soaring inflation, which has hit a fresh 40-year high of 10.1%.
Mortgage rates have shot up in recent months as a result of the rate hikes.
And recent turmoil in the markets as a result of former PM Liz Truss’ mini-Budget has pushed them up further.
Mortgage rates hit a 14- year high, but the appointment of a new PM and major u-turns on unfunded tax cuts has seen them start to fall back.
Earlier this month the average two and five-year fixed mortgage rates sat at their highest levels since 2008.
According to MoneyFacts the average two-year mortgage rate peaked at 6.65% on October 20 – up from 2.25% in the previous year.
The average five-year deal peaked at 6.51% – up from 2.55% in the previous year.
The latest data shows the average two-year-fixed mortgage rate is now down by 0.15% points on last week from 6.65% to 6.5%.
Average five-year fixed mortgage rates are also down by 0.15% points from 6.51% to 6.36%.
At the height of the trouble, some economists had feared that house prices could fall by as much as 15% and that the Bank of England would hike rates to 6% next year.
As well as the latest less severe prediction on house prices, investors now believe that the base rate will hit 5%.
It’s a spot of good news for homeowners and first-time buyers after a turbulent few weeks.
What could happen to house prices?
In its latest economic outlook Lloyds predicts that after next year’s 8% fall, house prices are likely to stagnate for the following four years.
Of course it’s worth noting that predictions are just that, and that no one can say for sure.
Lloyds has also predicted that house prices could fall by 13% if the economic outlook becomes worse, or 18% in the very worst case if the BoE hiked rates to 7% and inflation went over 14%.
And on the other hand if it improves house prices could fall just under 3%. That’s if the base rate went to just over 5% and inflation fell back to 6%.
Ray Boulger, mortgage expert at broker Jon Charcol, said that with markets returning closer to normal after the mini-Budget mayhem, it “takes some pressure off borrowers as they come to the end of their current deals”.
He said: “It is interesting that there is significant variation in forecasts from the major banks but I agree with Lloyds than an 8% fall is in the right ball park.
“With an 8% fall very few borrowers would fall into negative equity because even if the initial mortgage was at 95% LTV over 3% of the mortgage would be repaid in less than 3 years.
“Potential first-time buyers and movers should recognise that in general we are no longer in a sellers’ market and should therefore be prepared to negotiate hard on price if they find a property they want to buy.”
There are various sources of data on what house price are now and predictions of how they could change.
Latest data from the Land Registry shows that the average house price in August stood at a record £296,000.
Prices increased by 13.6% in the year to August, which was slower growth than the previous month of 16%.
Meanwhile Halifax said the average house price dipped in September as mortgage interest rates soared.
The annual rate of house price growth also slowed to 9.9% in September from 11.4% in August – returning to single digits for the first time since January.
A typical UK property now costs £293,835, according to Halifax’s index.
The most recent data from Rightmove said house prices hit a record high, despite recent turmoil in the mortgage market.
The average asking price on a property hit £371,158 in October – an increase of £3,398 on September and a 7.8% increase on the same time last year.
The property website said shortages of property for sale continue to underpin prices.
And the impact of the mini Budget which has pushed up mortgage rates has yet to be reflected in the property market.
House prices tend to fall in November and December every year as demand falls around this time.
The property site’s director of science said it will take some time yet to see the effect on house prices of recent events.