Inflation drops: have we dodged a house price crash?

by | May 25, 2023 | Property

For the last six months, rumours of a UK house price crash have begun to solidify. Rising inflation, and the related rise in the Bank of England base rate, have cooled the Mortgage and Housing markets considerably after the boom of 2022.

Alongside the increasing unease from the BTL market, home movers facing rising costs of living and rent are being forced to stay put or even downsize rather than join or climb the property ladder.

However, despite analysts predicting a price crash in the UK property market as recently as April, it has yet to appear. With inflation rates dropping below 9% for the first time in a year, has the UK dodged the projected house price crash?

Why did analysts project a house price crash?

The consistent rise in the Bank of England base rate in 2023 is one major reason industry experts have been warning in a sharp drop in property values.

In May the base rate was raised to 4.5% – the twelfth rise in a row – and the highest the rate has been since 2009. While theoretically good news for those saving in cash to buy a house, in practice higher interest rates serve only to price potential buyers out of mortgages, reducing the market for available housing and thus property asking prices.

Higher mortgage rates spelt bad news for many BTL landlords as well, who struggled to match the rise in mortgage rates to a rise in rents amid the cost of living crisis. Tracker mortgages, used by many BTL landlords, are linked directly to the base rate, meaning each price rise adds to their monthly operational costs.


House prices in the last six months

In March, the ONS recorded house prices at 4.1% above the same point 12 months ago. While showing growth, this figure is down from 5.1% in February, and the average sale price was £8,000 below the post-mini budget peak in November 2022.

However, the massive decreases of up to 20% some experts warned of have failed to appear. Nationwide’s seasonally adjusted price index shows a fall in prices of 4.6% since August 2022, with their analysts now expecting a total fall of 5-6% – a “soft landing” – provided interest rates and inflation continue to fall.

Why has the expected price crash failed to materialise? The chronic lack of UK housing seems to have played a part, with the drop in the number of property buyers still not enough to balance years of under-supply. While this is good news for sellers, first-time buyers are paying ever higher prices for their new homes, funded by high-interest rate mortgages.

What’s next for the UK housing market?

While industry predictions are trending more positively for the second half of 2023 and beyond, most analysts are still careful to hedge their bets.

Iwona Hovenko, real estate analyst at Bloomberg Intelligence, explained “Very narrow discounts of house prices agreed upon a purchase to those listed could imply a robust and resilient UK housing market, which might suggest a crash can be avoided in the absence of negative shocks.”

Barring these potential negative shocks, including another Base Rate rise or a reversal of the recent dip in inflation, the outlook for the UK housing market seems cautiously optimistic. With no end to the demand for new housing in sight, the concern may be less whether we will see a housing price crash and more if house prices can be made sustainably affordable for first-time buyers.

Read more about property in the UK:

Never stress about moving again.

Get all your utilities sorted, for free.

Start now
Never miss an offer again!
Exclusive offers & money saving tips