Savills has forecast a 10% fall in house prices next year, a significant downgrade from the one per cent drop the estate agency predicted in May.
Increasing borrowing costs, driven in part by successive Bank of England base rate rises over the year, will cause a market split between mainstream mortgage-dependent properties and prime markets.
In the mainstream market house prices will take a greater hit over 2023, according to Savills, falling 10% over the year before ticking up to 1% growth in 2024.
By the end of 2027 Savills expects prices to be growing by 5.5%, down slightly from 7.5% growth in 2026.
In its last forecast in May the estate agency had predicted house prices overall would drop by just 1 per cent next year, before recovering the losses with a 1.5% rise in 2024.
Prime markets are defined as broadly the top 5-10%t by value in each region and will see less of a fall in values next year and over a longer five year period, according to Savills.
This is because buyers of these more expensive properties are less likely to rely on mortgages.
Outside of London, Savills said it expected prime properties to fall in value by 6.5% in 2023 but see their values increase by 10% by the end of 2027.
In the prime market in central London prices are expected to fall 2% next year before rising 13.5% by the end of 2027.
While stark, Savills' latest forecasts are less severe than others. Nationwide's chief operating officer Chris Rhodes told MPs that the building society's worst case scenario sees house prices falling by a third (around 30%), however their base case sees prices drop by 8-10% in line with Savills'.
In its latest house price index, Nationwide revealed that house prices fell in October for the first time this year, with the typical home worth 0.9% less in October than it was in September.
Going down: The latest forecast by Savills and Oxford Economics sees average house prices in the second hand market falling 10% in 2023, before levelling off over the next four years© Provided by This Is Money
Lucian Cook, Savills head of residential research, says 'The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation.
'A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers' budgets.
'That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10% next year during a period of much reduced housing market activity.'
However, Cook went on to add that there were mitigating factors insulating the market from a bigger house price drop.
Low unemployment figures and the increase in mortgage stress testing over the past few months have reduced the likelihood of a more severe downturn, he said.
Furthermore, he added that there were indications that lenders were looking to work with existing borrowers to help them manage their household finances, which could reduce the number of forced sales.
However, a house price recovery after 2023 is reliant on interest rates being reduced according to Savills.
A 1% rise in house prices in 2024 depends on the Bank of England base rate falling to 3.5%, when it is currently forecast to hit 4% this year.
Looking ahead Savills expects house prices to rise 7% in 2026 if the base rate drops further to 1.75%.
The figures apply to homes in the second hand market, and not new builds.
The base rate, set by the Bank of England's Monetary Policy Committee, has been rising rapidly since December 2021 when it was just 0.1%. In September the Bank pushed up the rate to 2.25%, in a bid to curb rising inflation and reduce pressures on household finances.
In its most recent rise the Bank increased the rate by 0.75% to 3% - the single biggest increase for 33 years.
However, the increase in interest rates has had an adverse effect on mortgage holders as lenders have passed on the rise to borrowers.
The current average rate for a 2-year fixed mortgage across all deposit sizes is 6.46%, with the five-year average at 6.3%, according to Moneyfacts.
Prime central London properties are expected to be somewhat shielded, falling just two per cent in comparison next year.
“By contrast, London’s prime markets (broadly the top 10% by value), will be cushioned from some of the affordability concerns governing the mainstream markets due to much higher levels of equity and cash buyer numbers,” said Lucian Cook, Savills’ head of residential research.
It spells more trouble for Brits looking to get in on the capital’s rental market, which has suffered under a lack of stock and booming demand post-pandemic. It is good news for landlords, however.
Savills has forecast London rents to swell by another 5.5% in 2023, and by a total of 18.4% over the next five years.
“The rarefied market in central London’s top postcodes continues to look good value in historical terms, particularly when seen in the context of the weaker sterling and strong dollar,” added Frances McDonald, research analyst at Savills.
“A price recovery in this market appears long overdue. This will help shield it from further, more significant price falls, though it increasingly looks like a significantly stronger recovery in prices will not materialise in earnest before 2025, given the global economic backdrop and prospect of a UK general election in 2024.”