Experts have predicted that rising interest rates and a steep increase in the cost-of-living, will cause a dramatic decline in UK house prices. But will the UK head for a crash, or will prices significantly drop?

Will House Prices Begin to Fall in 2022?

With the average UK home now costing 7.1 times the average income of a full-time worker, the gap between house prices and the average income is now equivalent to what was witnessed in 2008, just before the last financial crash. So, it’s no surprise that experts are predicting a similar outcome in 2022.

Why are property prices in the UK so high?

According to Nationwide data, the average price of a UK property has nearly tripled since the turn of the century and has climbed more than 60% in the previous ten years. As of May 2022, house prices have increased by 1.0%, the eleventh consecutive monthly rise, with the average house price now reaching £289,099.

The primary long-term driver behind the price increase seems to be a simple imbalance in supply and demand.

To begin, the UK government announced a Stamp Duty holiday in July 2020 to aid the recovery of the housing market, which effectively reduced house prices for many individuals. As this holiday was time-limited and was due to end in June 2021, many individuals raced to take advantage of it.

This coupled with the slowed development due to pandemic-induced workforce shortages and supply issues, the high degree of demand and the shortage of supply hiked up the prices.

As Stephen Clark, from Finbri, a Bridging Loan broker explains, “Until very recently, the buoyant property market has been supported by the record-low BOE base rate of 0.1%. With four rate rises so far in 2022 the base rate now stands at 1.25% which will increase the cost to mortgage borrowers. If rate rises continue on this trajectory it is likely this will take some of the heat out of the red hot housing market.”

Will the property market crash in 2022?

Successfully predicting the UK housing market is notoriously difficult at best, but a property crash currently appears unlikely. An imbalance between supply and demand in the housing market still exists. With the significant need for new homes but with scarcity of availability, prices continue to increase.

The huge growth we have seen in the last few years could soon begin to cool, and the cost of living is likely to be the driving force behind the anticipated slowdown. With record highs in fuel and energy prices, rising inflation, and tax increases, most households have less disposable money to spend.

If demand falls and consumers are only able to place smaller deposits on properties, the rate of house price growth may drop, but not significantly enough to cause a crash.

While a crash appears improbable, the stress on household finances as a result of the cost of living crisis suggests that house price growth may level off as the year progresses.

What are the price predictions for 2022?

Given the ongoing supply and demand issues, many house market forecasts remain upbeat about the situation. The Hamptons house price estimate expects an annual increase of 3.5% between 2022 and 2024, while Lloyds Banking Group expects house prices to remain strong over the next year but slowing to 1% in 2022.

In the short term, the property market is expected to continue its upward trend. Rising interest rates, on the other hand, will cause the housing market to stagnate by the end of the year and into 2023.

According to Capital Economics, the Bank of England’s base rate will peak at 3% in the second half of 2023, raising average mortgage rates to 3.6%, double the 1.6% rate recorded at the end of 2021.

Rightmove predicts that house price growth will slow from 9.7% to 5% by the end of 2022. This follows a 0.4% monthly increase in housing prices in June, the weakest monthly gain since January.

So while a crash is not probable now or in the near future, house prices are looking to slow in growth by 2023. However, the new help-to-build scheme launched by the government may increase the level of availability of properties, thus easing the pressure in the future.