In the Savills UK forecast for the property market, the firm revised its outlook following the base rate rising to 3% yesterday.  

It put this down to a rise in borrowing costs and said there would be a split between the mainstream, and prime markets (high net worth individuals buying property of £1m+).  

All regions are expected to report price falls of between 5% and 10%, although prime markets will see less severe drops as buyers in this segment will be more able to transact. For example, Savills predicted that in London’s prime market, house prices will decline by a modest 2%. 

In the mainstream market, as long as interest rate rises ease as expected by mid-2024, house values will start to recover with rises of over 6% in nominal terms over the next five years. 

Housing transactions will fall to 870,000 next year as first-time buyers and buy-to-let investors are squeezed by mortgage affordability. They will then rise to one million in 2024 and increase further to 1.1 million for the next three years. 

Rental growth will rise by 6.5% or more next year, then slow to 4% in 2024. There will then be growth levels of roughly 2% for the following three years. 

Housing demand dynamics have changed

Lucian Cook, Savills head of residential research, said: “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. 

“There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis. Borrowers who haven’t locked into five-year fixed rates had their affordability heavily stress-tested until August this year. This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.” 

He added: “And looking longer term, the Bank of England’s relaxation of mortgage regulation over the summer has substantially enhanced the prospect of a price recovery; but only as and when interest rates start to be reduced, once inflationary pressures in the wider economy ease.”