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House prices to fall 10% and base rate will rise

After yesterday’s 2023 budget announcement, there has been questions around how this news will affect mortgages and the housing market.

A photo of Grace Lynch, the author

By Grace Lynch

Published on: 16 March 2023

3 min read

House prices to fall 10% and base rate will rise

After yesterday’s 2023 budget announcement, there has been a lot of questions around how this news will affect mortgages and the housing market moving forwards.

We have spoken already about some of the complaints property and mortgage experts have had due to a lack of support for UK home buyers and property development. The Office for Budget Responsibility has now given some predictions based on yesterday’s budget, which we will discuss below.

House prices fall a further 10%

It’s looking likely that house prices will drop by a further 10% this year due to ‘low consumer confidence’ in the cost of living crisis. This isn’t great news for anyone who had been planning to sell this year, though it could be a good opportunity for those looking to buy.

The Office for Budget Responsibility (OBR) expects sales in the property market to drop by 20% for the same reasons. It is predicted that house price growth could begin to rise to previous levels again by 2026 but this could be affected by several different factors including:

  • Changes to the Bank of England Base Interest Rate
  • Supply and demand for housing in your local area
  • Strength of the UK economy at the time you are looking to buy
  • High demand in your area can lead to much higher property prices

Mortgage rates to remain above 4%

Lenders began raising interest rates following last years Autumn mini budget, which had a disastrous impact on the UK economy. These higher mortgage rates will eventually reduce, but the interest rate rise is still impacted the monthly payments of borrowers across the UK.

Mortgage rates are expected to stay above 4% on average for the next few years. Several lenders recently had begun offering lower mortgage rates, some even offering fixed rate mortgage deals below 4% interest.

While these deals may still be on offer, for how long remains to be seen. The Office for Budget Responsibility believes average interest rates for mortgages will peak at just over 4% (4.2%) by 2027. This is several percentage points lower (0.8%) than previously predicted last year.

Bank of England base rate will increase

There have been several increases to the Bank of England’s Base Rate of interest over the last year, in line with rising costs of basics such as energy, food and heat. These rising costs are known as inflation and we will have all felt the impact of higher prices over the last 12 months.

The Bank of England increases their base interest rate to try and slow demand for products such as mortgages, trying to decrease demand to help keep the economy stable. This base rate is what will be used to calculate how much interest is charged for loans, credit cards, mortgages and more. Currently, the base rate is 4% which is the highest level in 12 years.

The Office for Budget Responsibility expects this rate will increase again slightly to around 4.3% towards the end of this year. This should hopefully be temporary, as the OBR believes the rate will eventually return to around 3%. Inflation is also expected to drop from 10.7% to 2.9% by the end of 2023.

You can read more about the Bank of England base rate in our MPO Interest Rate Forecast.

Resources

Office for National Statistics – How increases in housing costs impact households

Bank of England – Interest rates and Bank rate

Gov.uk – UK House Price Index: reports

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