House prices are expected to fall by nearly 10% over the next couple of years, largely driven by higher mortgage rates and the wider economic downturn.
The Office for Budget Responsibility (OBR) said house prices are forecast to drop by 9% between the fourth quarter of 2022 and the third quarter of 2024.
Average interest rates on the stock of outstanding mortgages are expected to peak at 5% in the second half of 2024, the highest level since 2008, it added.
Due to large numbers of home owners sitting on fixed-rate mortgages, higher interest rates on new deals take a while to feed through to the stock of existing home loans.
— Office for Budget Responsibility (@OBR_UK) November 17, 2022
As the economy recovers, house prices are expected to be around seven times earnings, although the OBR said there is significant uncertainty over its forecast “given the sensitivity of house prices to mortgage rates and the recent volatility in the bond yields that drive pricing in the mortgage market”.
The economic and fiscal outlook was released as Chancellor Jeremy Hunt said the stamp duty cuts previously announced in the mini-budget will remain in place but only until March 31 2025. Stamp duty applies in England and Northern Ireland.
Mr Hunt said: “After that I will sunset the measure, creating an incentive to support the housing market and all the jobs associated with it by boosting transactions during the period the economy most needs it.”
The mini-budget changes raised the general threshold at which stamp duty applies from £125,000 to £250,000, lifting around 200,000 more people every year out of paying stamp duty, according to previous Government calculations.
First-time buyers, who already paid no stamp duty on the first £300,000 of the price of a property, saw the threshold raised to £425,000.
Institute for Fiscal Studies director Paul Johnson said Mr Hunt is abolishing “about the only good policy” from Kwasi Kwarteng’s autumn mini-budget by removing the stamp duty cut in 2025.
Mr Johnson tweeted: “Shame – cuts to stamp duty announced in mini-budget to be abolished in 2025. About the only good policy in that event!”
Shame – cuts to stamp duty announced in mini budget to be abolished in 2025. About the only good policy in that event!
— Paul Johnson (@PJTheEconomist) November 17, 2022
Mr Hunt also said people in social housing in England will be supported with the cost of living by limiting the increase in their rents.
Under current rules, rents could have risen by up to 11.1% – but now they will only be able to rise by a maximum of 7% in 2023-24.
This will save the average tenant in the social rented sector £200 next year, the Government said.
To support mortgage borrowers with rising interest rates during periods of low income, from spring 2023 the Government also said it will allow those on universal credit to apply for a loan to help with interest repayments after three months instead of nine.
Lucian Cook, head of Savills residential research, said: “Time-limiting the previous change to stamp duty thresholds will offset some of the pressures on housing transactions over the short term, particularly as the deadline for change approaches in March 2025.
“But while we should never underestimate the ability of stamp duty measures to distort the market, this time around the higher costs of debt will undoubtedly constrain that effect.”
Looking at mortgage rates, which rose sharply following the previous mini-budget, he said: “Over the past week or two we’ve seen lenders begin to lower their fixed rates.”
Iain McKenzie, CEO of the Guild of Property Professionals, said: “There may be some realignment in pricing to adjust for the rising cost of living but the market will recover.”
Richard Donnell, executive director of research at Zoopla, added: “The Government’s announcement of a reversal of the recently announced stamp duty changes in 2025 signifies a real need to reform stamp duty – a tax that is now starting to resemble income tax where it’s the top tax bands generating the greatest receipts.
“This reversal will make it increasingly difficult for prospective first-time buyers to get on the housing ladder in the coming years, particularly in London and the South East which account for the majority of stamp duty receipts.”