Ask any estate agent about 2021 and they will speak in quiet wonder at the sales they saw. A huge demand for bigger homes following lockdown, fuelled by a cut to stamp duty rates, led to a seller’s paradise, especially in more rural or coastal areas.

“It was amazing,” said Neil Bartlett, managing director at John Lake estate agents in Torquay, Devon. “There were so many people migrating down to our area that demand was almost unbearable. It went bonkers. But we knew that was never going to last.”

That prediction proved correct. Demand already started to simmer down last summer when a disastrous mini-Budget in September caused havoc for the housing market as mortgage lenders hiked rates and pulled hundreds of products. The average rate on a two-year fixed mortgage jumped to a 14-year high of 6.65 per cent. At the same time, inflation reached its highest level in four decades, biting into households’ spending power.

Six months later, homeowners and first-time buyers are wondering what will happen to the housing market. Although mortgage rates have come down to an average 5.09 per cent for a two-year fix and 4.71 per cent for a five-year fix, according to U-Switch, they remain high for recent standards, fuelled by the Bank of England pushing interest rates up to 4 per cent, the highest level since 2008.

At the same time, the mortgage provider Nationwide reported a 1.1 per cent annual fall in house prices in February, the biggest drop since November 2012, to an average price of £258,297. Mortgage approvals have also fallen for a fifth consecutive month, and housing transactions were down 11 per cent in January compared with the previous year.

Meanwhile, housebuilders are slashing output due to falling demand, with Persimmon cutting its target this year to between 8,000 and 9,000 homes, compared to the 15,000 it built in 2022.

So what will happen to the housing market in the next 12 months? We talk to experts across the property sector to find out.

End of the boom years
Property analysts are confident that house prices will not plummet, with few predicting the sort of crashes seen during the financial crisis of 2007-08 or the recession of the early 1990s. Instead, homeowners should prepare for years of flat or very small house price growth of 2 to 3 per cent. The latest figures from the Office for National Statistics showed house prices still rising by 9.8 per cent annually in December, down just slightly from 10.6 per cent in November, but these kinds of gains are likely to end soon.

Richard Donnell, executive director of research at Zoopla, said: “Rather than a crash, we’re going to have a much longer drawn out period of very low house price inflation.”

This is because mortgage rates are likely to stay higher than their average in the past decade, squeezing the amount of debt people can take on, but not being so severe as to significantly push down house prices.

“We’ve got this hit to buying power and it’s going to work its way through as pretty much static house prices over the next few years. If rates really stay at 4 per cent for the next several years, then the best house prices can do is rise in line with household incomes basically.”

This also means that homeowners may need to adjust from the view that they will always enjoy a large profit when they come to sell their property.

Lucian Cook, director of residential research at Savills, said: “The ability to accumulate wealth in the housing market – which has been significant since the second half of the 20th century – is now becoming much more dependent upon your financial acumen and ability to pay down your existing mortgage debt, rather than simply being able to rely on: ‘inflation plus house price growth’.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, said most lenders are confident that the Bank of England will not hike interest rates too much further, meaning mortgages to unlikely to reach back up to 6 per cent. However, he said it may be several years before borrowers can see rates below 2 per cent for five year fixed mortgages again.

“The doommongers were talking about seeing double-digit mortgage rates after the mini-Budget. Fortunately, it never went that bad,” Harris said. “Rates are going to come down but no one is quite confident as to when.” He said many of his company’s clients were taking on two-year fixed mortgage rates now in the hope that when that comes to an end, the average five-year fixed rate mortgage will be below 3 per cent.

Anyone selling their homes should take heart that any drop in house prices still comes after a period of stellar growth during the pandemic. The average UK home grew in value by £48,620 between January 2020 and December 2022, according to Halifax. Now that the market has shifted to favouring the buyers, sellers are having to accept an average discount of £14,100 from their asking price to achieve a deal, data from Zoopla shows, meaning they are still banking in around £35,000 of pandemic gains.

The housing market is also readjusting to conditions seen before 2021. The volume of sales is down 24 per cent compared with February last year, but up 1 per cent compared with the average between 2017 and 2019, according to Zoopla. “The frothy market conditions of the pandemic years are well and truly behind us,” Donnell said.

Little sign of complete collapse in the market
While Britain’s booming market is now significantly cooling, fears of a complete collapse in the market appear to be unfounded.

Unemployment in the UK remains near a record low of 3.7 per cent. This compares with 10.6 per cent in 1992 when house prices were falling by more than 20 per cent, or 8 per cent in 2009 when prices fell 15 per cent.

“While you will have lots of households who will find it more difficult to pay their mortgage bills, you don’t have accompanying high levels of unemployment to result in lots of people having absolutely no means to meet their mortgage and therefore banks foreclosing,” Cook said.

Mortgage regulation was also tightened up significantly after the financial crisis in 2008. From 2014, lenders were required to check whether a borrower could still pay their mortgage if interest rates were to rise by 3 per cent. While this rule stopped in August last year, banks are prevented from issuing many loans that are more than 4.5 times the size of the borrower’s income. Mortgage lenders are also now expected by regulators to do everything they can to avoid the repossession of someone’s home.

There has also been less runaway growth in expensive housing areas such as London and the South-East over the past five years than was seen in the lead-up to previous big crashes. This is partly a result of tighter mortgage regulations, combined with the average house already being so high, costing nine times average earnings in the UK, and 11 times in London.

“Mortgage regulation introduced after the global financial crisis was designed to stop consumers basically gorging themselves on cheap mortgage rates to massively bid up house prices, which would have meant a bit of a calamity when mortgage rates rocketed,” Donnell said. “If we hadn’t had mortgage regulations, house prices pre-pandemic would have been 30 per cent higher in London, and therefore much more likely to have fallen now.”

Two-tier market
Unfortunately for first time buyers and those on lower rungs of the property ladder, housing experts believe that more of a two-tier market will emerge. About 8.1 million households in England and Wales own their home outright with no mortgage, equating to 32.8 per cent of the entire housing stock, official census data shows. A decade of low mortgage affordability will have also helped many other households pay off much of their mortgage. These homeowners are likely to drive both prices and transactions this year, David Fell, a senior analyst at Hamptons, said.

“There are a lot of older, equity rich homeowners where the impact of higher interest rates on their housing costs is negligible. I think it is quite likely that they are going to hold up quite a large chunk of the market. Whereas at the other end, you’ve got first time buyers and second steppers who are going to be squeezed a lot harder,” Fell said.

This is currently leading to many sellers holding out from cutting prices, according to Fell. Hamptons data shows sellers are waiting an average 82 days of their property being on the market before making a reduction compared to 74 days last year.

He added: “There’s still a general reluctance among sellers to cut prices particularly quickly. Vendors are in the main still quite happy to sit tight and wait longer for the price they want, which may in the short term drag on transactions but support prices.”

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