Housing market mortgage rate predictions for 2024
Mortgage rates look set to remain higher for longer into 2024 and we’re not expecting them to fall back to 4.5% until H2 2024.
That means housing affordability will really only improve if people are able to earn more money and their incomes grow.
The ongoing rise in wages will be the main factor that supports sales volumes for the housing market in 2024.
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What’s going to happen to house prices in 2024?
UK house prices are expected to fall 2% over 2024.
Homes are currently looking expensive by historic standards amid rising mortgage rates over the last 18 months.
If house prices fall further and incomes increase, or mortgage rates fall back, affordability will improve for home buyers and this in turn will support sales.
The number of homes for sale has now reached a 5-year high, meaning sellers will need to keep pricing competitively if they’re serious about selling. This will keep pricing under pressure.
In 2023, the south of England bore the brunt of house price falls but those falls are now spreading further afield.
Today, 4 in 5 housing markets are registering annual price falls, up from less than 1 in 20 just six months ago.
But crucially, the scale of price falls is modest and limited to very low single digits. No markets are currently registering annual price falls of more than 5%.
However in 2024, we expect to see an increase in markets registering 5% falls, as sellers continue to adjust their asking prices in the face of weaker buying power.
Despite this, the risk of a major collapse in prices is becoming less of a concern, and an improvement in sales hinges more on buyers’ financial ability to move when mortgage rates are in the 4-5% range.
And while the likelihood of a double-digit price drop remains low, housing affordability needs to improve to bring more buyers back into the market and to support sales volumes.
Read the full House Price Index by Richard Donnell
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How can housing affordability improve?
Right now, house prices haven’t fallen as much as expected, while mortgage rates remain at 5% or higher, so housing still looks expensive by recent standards.
Faster growth in household incomes over 2024 would improve buyers’ affordability, along with mortgage rates falling over 2024.
Household finances have also been under pressure from rising living costs, with inflation eroding any growth in incomes.
Fortunately, this is now reversing at last and the Bank of England currently projects that inflation will fall to its target of 2% in the first half of 2025.
This, along with a real income growth, will be important in supporting buyer demand.
Housing market could rebound if affordability improves
Our Executive Director of Research, Richard Donnell, says there is scope for a rebound in market activity if affordability improves.
‘The housing market is adjusting to higher borrowing costs through lower sales rather than a big decline in house prices.
‘Asset prices around the world are also adjusting to higher borrowing costs and there is a lively debate in financial circles about the long-run outlook for borrowing costs, which sets the outlook for mortgage rates.
‘Most agree we aren't returning to the years of very cheap borrowing as central banks sunset policies that created cheap money to support economies after the global financial crisis and over the pandemic.
‘Mortgage rates of 4-5% remain low by historic standards, albeit higher than in recent years.
‘Assuming mortgage rates remain in the 4-5% range, we see UK house price growth remaining in the low single digits for the next 1-2 years, below the projections for growth in household incomes.’
This would mean that for the first time in ten years, house prices would start to become more affordable, increasing consumer confidence in making large purchase decisions.
Why haven't house prices fallen more?
There are three reasons why house prices haven’t tumbled, defying predictions for larger falls in 2023:
1: The economy is growing, albeit slowly, while unemployment remains low and incomes are increasing.
2: Lenders are supporting customers to refinance through longer term mortgages, interest-only mortgages and mortgage holidays, limiting the number of forced sellers.
3: Tougher affordability criteria from lenders has meant that while new mortgaged buyers may have been paying just 2% for their mortgages, they’ve still had to prove to their bank they could afford a 7% rate.
That has meant that mortgaged buyers could afford higher rates as they remortgaged.
However, banks are now stress testing new borrowers at 8-9% rates, even though they're actually paying 5%, which is compounding the reduction in buying power and hitting sales.
Homes are currently over-valued and prices likely to fall further
The chart below plots our measure for how much house prices are over- and under-valued over time.
It shows periods of over-valuation in the late 1980s and again in the runup to the global financial crisis in 2007, after which house prices fell over the subsequent recessions.
Will more buyers return to market in 2024?
We expect to see the usual seasonal rebound in demand next spring as pent-up demand returns to the market.
However, the number of sales taking place is set to be lower than spring this year.
General Elections also tend to create a pause in activity, which is why we expect another year with 1m home moves in 2024.
It will be five years since the last general election on December 17 2024. If a general election isn’t called by then, parliament would automatically be dissolved and the election would take place 25 working days later: January 28, 2025.
If mortgage rates fall back to 4% more quickly, the number of sales set to take place would improve.
Buyers are currently hesitant to move amid the uncertainty over house price falls and higher mortgage rates.
This is particularly the case with upsizers looking to secure larger family homes.
Our recent consumer survey reveals parts of the population are still keen to move, but many are hoping and/or waiting for mortgage rates to get lower again before they do.
Cash buyers set to be the biggest buying group in 2024
The biggest group of buyers in 2024 is set to be cash buyers, followed by first-time buyers, as rents continue to rise.
Upsizers are being hit hard by higher mortgage rates, as the larger properties they’re looking to secure require bigger mortgages.
But if they can be encouraged to be more flexible about what they want to buy and where in 2024, this would support overall sales volumes.
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