With the U.K. housing market’s recent boom, house prices have soared considerably over the past two decades, increasing by 44% nationally and by 74% in London since 2007. In particular, the pandemic has been a key driver, sending house prices skyrocketing by 20%. 

However, mortgage rates are rising and this is putting downward pressure on house prices. According to data from Halifax, one of the U.K.’s largest mortgage lenders, average house prices fell 2.4% year on year in July 2023. That same month, property sellers cut asking prices by an average of -0.2%, as reported by property search portal Rightmove. In addition, the Royal Institution of Chartered Surveyors (RICS) House Price Balance, which measures the gap between the percentage of respondents seeing rises and falls in house prices, plunged to -46% in June, down from -30% in May. 

“House prices have been trending downward since July 2022 and could gradually continue to slide. Higher borrowing rates could lead to a deepening correction for the housing market across the medium term,” said Raul Sinha, who is part of the European Banks Research team at J.P. Morgan. As a rule of thumb, every one percentage point increase in real interest rates slows the pace of house price growth by about two percentage points, according to the International Monetary Fund.

What does this all mean for the U.K. housing market? Find out. 

Are UK mortgage rates expected to drop?

They remain volatile but are unlikely to return to the low levels seen in recent years. While lenders decide their own mortgage rates, they usually take cues from expected future Bank of England (BoE) interest rates. Due to persistent inflation, the BoE is poised to continue interest rate hikes.

This will, in turn, filter through to higher mortgage rates. In early August, the typical two-year fixed mortgage rate rose to 6.83% — the highest level since 2008 — while the average five-year fixed mortgage rate hit 6.34%. However, some lenders have begun lowering rates as the inflation outlook gradually improves.

Elevated mortgage rates are impacting affordability and dampening demand. “Indicators such as new inquiries and mortgage approvals have deteriorated, risking a double-digit decline in house prices,” Sinha said. “Also, overall mortgage durations are lengthening, given higher rates and affordability concerns in our view, with a growing proportion of consumers taking out new purchase mortgages with terms of more than 30 years.” 

Indeed, the burden on households is significant, given that mortgages represent 88% of U.K. household bank lending on a system level. “Compared with its peers, the U.K. has one of the largest mortgage markets and a high level of household indebtedness,” Sinha noted. “Plus, our Credit team estimates that around £322bn of mortgages have faced or will face a reset in 2023 through to the second half of 2024, representing around 25% of outstanding mortgages.” 

What is happening with UK house prices?

While house prices have fallen, they appear to be broadly stabilizing. On one hand, higher mortgage rates push house prices down as consumers are less willing to borrow money, thereby cooling demand. On the other hand, however, supply constraints and a tight labor market are putting a floor on prices.

“Housing indicators have been choppy for the last few months and have not provided a clear message,” said Allan Monks, a U.K. economist at J.P. Morgan. “While rising mortgage rates imply further declines may materialize in the year ahead, weak supply is preventing house prices from contracting, and there is no real sign of a more abrupt slowdown.”

Indeed, just 233,000 new homes were built in 2021/2022, falling short of the U.K. government’s target of 300,000 new homes per year. In addition, the number of available properties for sale in the U.K. was 12% lower in June 2023 compared with June 2019, according to Rightmove. “We continue to see a structural mismatch between the supply and demand of housing, including cutbacks to new residential building projects, which will likely support prices,” Sinha said. 

Looking ahead, supply will likely remain a limiting factor in the medium term. “While sales rates for the U.K. housebuilding sector have held up well at levels above the lows seen after the September 2022 mini-budget, potential softening over the summer is likely to put 2024 volume recovery in jeopardy. We now expect a 25% decline in volume for the 2023 calendar year, and a stable trend in the 2024 calendar year on average,” said Rajesh Patki, who is part of the European Construction and Building Materials research team at J.P. Morgan.

U.K. house prices are also being supported by the labour market, which remains resilient despite some signs of loosening. “This has limited the number of forced sellers so far and prevented a large rise in the supply of housing,” Sinha noted.

In light of these factors, U.K. house prices could be beginning to stabilize — at least for now. “Overall, it appears as though house prices are broadly flat rather than falling, underpinned by weak supply,” Monks said. “As rates rise further, prices are likely to show more declines. But the downtrend may have finally been arrested for the time being and house prices could hover around current levels for a while longer.”