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House prices to fall 10% before rising again in 2026

Nick Cheek
Written By:
Nick Cheek

Following yesterday’s Budget, the Office for Budget Responsibility (OBR) produced its wide-ranging economic and fiscal outlook – March 2023, in which it gave its forecasts for house prices, mortgage rates and the direction of the Bank of England base rate

As the dust settles on yesterday’s Budget the third in just six months and economists and experts digest Chancellor Jeremy Hunt’s key policy changes, the OBR has published it economic outlook for 2023 and beyond.

House prices to plummet

According to the OBR, a mixture of “low consumer confidence, the squeeze on real incomes, and the expectation of mortgage rate rises to come are expected to contribute to continued falls in house prices and a reduction in housing market activity.”

The organisation forecasts that house prices will drop 10% from their high in the fourth quarter of 2022, a one percentage point larger fall than in its November forecast.

The OBR expects property transactions to drop 20% relative to their peak in the same quarter.

It noted that “leading indicators from Halifax and Nationwide suggest that house prices have already fallen by 3-6% between their peak in the middle of 2022 and February 2023.”

However, the OBR predicted that prices would start rising again in 2026.

Despite the potential falls in both prices and sales, there was little to nothing in the Budget about the housing market.

Jonathan Stinton, head of intermediary relationships at Coventry Building Society, said: “This has turned out to be the Budget where homebuyers were forgotten.

“The Chancellor’s had a lot of pressure to help those struggling with the cost of living, while avoiding a repeat of the events in September, but that doesn’t mean support for homebuyers should be ignored.”

Mortgage rates double from 2021 levels

In terms of mortgage rates, the OBR predicted that the average interest rates on the stock of outstanding mortgages was expected to peak at 4.2%t in 2027, double the figure at the end of 2021.

The peak is 0.8 percentage points lower than forecast in November given lower market expectations for base rate.

The report stated: “With more than 80% of mortgages on fixed term contracts and the prevalence of fixed rate mortgage contracts with terms of more than two years having risen in recent years, the increase in rates on new mortgages over recent months will take several years to feed through to the average mortgage rate.”

Base rate hits 4.3% and then falls back

The Bank of England’s Monetary Policy Committee raised the base rate to 4% at its February meeting, the highest level since 2008.

The OBR expects it to go higher, but not by much and not for too long.

It said: “The market expectations underpinning our central forecast point to it rising further to a short-lived peak of 4.3% in the third quarter of 2023, 0.7 percentage points below the peak of 5% in our November forecast.

“The base rate then falls back to 3% by the forecast horizon, 0.6 percentage points below our November forecast.”

Finally, the OBR also noted that inflation was set to fall to 2.9% by the end of the year, from a peak of 10.7% in the final quarter of 2022.