UK house prices are overvalued, suggesting they will fall in some parts of the country. But the big question is: how far do prices have to fall? And where are prices most overvalued?
New data from Zoopla this morning shows that UK house prices are currently 8% ‘overvalued’ but will be ‘fairly valued’ by the end of the year due to rising incomes.
Zoopla has a long-term model that tracks whether house prices in Britain are overpriced or fairly valued. This, the property portal says, highlights how UK house prices were over 50% overvalued in the run-up to the 2007 global financial crisis, and even more overvalued during the housing boom of the late 1980s. In both cases, the economic recession led to double-digit house price declines.
The latest analysis shows that the jump in mortgage rates in 2023 has led to UK house prices being overvalued by 13% by the end of 2023. This overvaluation of house prices explains why there has been modest annual price declines over the past year compared to previous periods.
Currently, UK house prices are estimated to be 8% overvalued (Q1 2024), but this overvaluation will disappear by the end of the year, assuming house prices rise by 1.5% by the end of this year – which Zoopla thinks will happen – and the mortgage interest rate remains at 4.5%. Rising incomes and longer mortgage terms will help improve affordability, which will in turn support continued improvement in sales volumes and single-digit house price growth in the second half of 2024.
In contrast to the lower sales in 2023, Zoopla data shows the market remains on track for 1.1 million sales in 2024. 75% of these sales expected in 2024 have been completed or agreed and are working towards completion – with a quarter of a million sales still to be agreed. The sales figure of 1.1 million is 10% higher than 2023 but still below the 20-year average, but rising sales are positive and show greater realism on the part of sellers and renewed, cautious confidence among buyers.
Looking ahead, Zoopla says the outlook for the sales market in the short term will depend on the outlook for mortgage rates, which are a function of the outlook for interest rates. Based on local authority base rate forecasts, mortgage rates are expected to remain between 4% and 4.5%, which is sufficient to support sales volumes and low single-digit house price growth.
House prices in the South of England are expected to continue to underperform the UK average as they come back into line with incomes, with income growth key to supporting sales and demand through to 2025. Price declines are currently largest in the East (-1.4%) and South East (-1%), with Canterbury in Kent topping the charts with the largest price decline (-4.1%). Prices are rising by up to 3.3% in Northern Ireland and 1.5% in the North West, with Sunderland seeing a price increase of +5.2%.
Richard Donnell, executive director at Zoopla, said: “The housing market continues to adjust to higher borrowing costs due to modest falls in house prices and rising incomes. Buyers using mortgages are also relying on longer mortgage terms to get those extra few percentage points of purchasing power to afford a home.
“The general election campaign has had a limited impact on market activity, although the seasonal summer slowdown is coming. Contracted sales have continued to rise and more homes for sale means more buyers will be looking to move in the second half of the year. The timing of the first base rate cut is a key moment and will boost both market sentiment and sales activity. Overall, we expect house prices to be 1.5% higher in 2024.”