Overvalued house prices will settle by the end of the year: Zoopla

UK house prices are currently over-valued by an average of 8%. However, rising incomes are set to tame this figure before the year is out, according to Zoopla's latest analysis.

Related topics:  Property,  House Prices
Property | Reporter
28th June 2024
FTB 850
"The housing market continues to adjust to higher borrowing costs through modest house price falls and rising incomes. Buyers using mortgages are also relying on longer mortgage terms to gain that extra few percentage points of buying power to afford a home"
- Richard Donnell - Zoopla

UK house prices are on track to be 1.5% higher by the end of 2024 as income growth steadily eases the impact of higher mortgage rates, say Zoopla in the latest House Price Index.

Homebuyers are largely shrugging off the election with new sales agreed 8% higher, with demand up 6% and 19% more homes for sale than a year ago.

There are signs that market activity is beginning to seasonally slow. Sales agreed are down slightly month on month across all regions, led by the North East (-6%) and West Midlands (-5%) as the overall stock of homes for sale continues to grow across all areas, albeit at a slower rate than recent months.

Housing remains over-valued but the trend is improving

Zoopla has a long-run model that tracks whether UK house prices are too high or fairly valued.

This highlights how UK home prices were more than 50% over-valued in the run-up to the global financial crisis in 2007, and even more over-priced in the late 1980s housing boom. In both these cases, economic recession led to double-digit house price falls.

The latest analysis finds that the jump in mortgage rates over 2023 led to UK house prices becoming over-valued by 13% at the end of 2023. This more modest over-valuation of home prices explains why there have been modest annual price falls over the last year compared to previous periods.

Currently, UK house prices are estimated to be 8% over-valued (Q1 2024) but by the end of the year, this over-valuation will disappear, assuming that house prices rise 1.5% and mortgage rates remain at 4.5%. Rising incomes and longer mortgage terms are helping to improve affordability which will, in turn, support the continued improvement in sales volumes and single-digit house price growth over H2 2024.

75% of this year’s sales are completed or in progress

In contrast to reduced sales throughout 2023, Zoopla data shows that the market remains on track for 1.1 million sales in 2024. 75% of these sales expected in 2024 are either completed or agreed upon and are working toward a completion - with a quarter of a million sales yet to be agreed.

The 1.1 million sale figure is 10% higher than 2023 but still below the 20-year average, however rising sales are positive and show more realism on the part of sellers and renewed, cautious confidence amongst buyers.

Interest rates hold the key

Looking ahead, the near-term outlook for the sales market will depend on the outlook for mortgage rates which are a function of the outlook for interest rates. Based on city forecasts for base rates, mortgage rates are expected to remain in the 4-4.5% range which is sufficient to support sales volumes and low, single digit levels of house price growth.

House prices in the south of England are expected to continue to under-perform the UK average as they re-align with incomes as income growth is the key to supporting sales and demand into 2025.

Price falls are currently greatest in the Eastern region (-1.4%) and South East (-1%), with Canterbury in Kent topping the list with the biggest price fall (-4.1%). Prices are rising by up to 3.3% in Northern Ireland and 1.5% in the North West region, with Sunderland experiencing +5.2% price increase.

Richard Donnell, Executive Director at Zoopla says: “The housing market continues to adjust to higher borrowing costs through modest house price falls and rising incomes. Buyers using mortgages are also relying on longer mortgage terms to gain that extra few percentage points of buying power to afford a home.

"The general election campaign has had a limited impact on market activity although the seasonal summer slowdown is arriving. Sales agreed continued to increase and more homes for sale means more buyers looking to move in the second half of the year. The timing of the first cut in the base rate is a key moment and will give a boost to both market sentiment and sales activity. Overall we expect house prices to be 1.5% higher over 2024.”

Tom Bill, head of UK residential research at Knight Frank, said: “House prices have been kept in check this spring as buyers hesitate due to the election and the uncertain timing of the first rate cut since March 2020.

"A new government will add a dimension of political stability when the autumn market starts in September and even if the bank rate is not lower by then, a cut will be imminent. Given that mortgage rates will steadily reduce as services inflation comes under control, we expect UK house prices to rise by 3% this year.”

Foxtons CEO, Guy Gittins, commented: “While house price inflation in May is flat, as you could rightly expect before an election, it should be noted that we’ve seen consistently positive demand and sales agreed activity across 2024. With forecast house price rises now roughly in line with current inflation rates, it’s still very clear that property ownership is high on the agenda for hundreds of thousands of people across the UK.

"Certainly in London, the market is considerably more active today than last year and crucially, aspiring property owners and sellers are undeterred by the looming election. Historically, when we see this as a trend, it continues to deliver a strong market post-election. With people’s confidence high after the summer and an expected interest rate cut, the market could be very busy through to the end of the year.”

Nathan Emerson, CEO of Propertymark comments: “It’s been a positive year so far for the housing market, and it’s extremely upbeat to see confidence returning, despite some of the challenges people have faced such as high inflation and interest rates.

"With the general election now less than a week away, we are keen to see any incoming government lay down their full plans to further support current homeowners on aspects such as energy-efficiency but also to fully get behind key groups like first-time buyers as they set out on their property journey.”

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