Will mortgage rates rise or fall, will house prices remain stable and is negative equity a real concern? Get the latest with our House Price Index.

Mortgage rates look set to fall in 2023 

Events are moving fast in the worlds of politics and the financial markets.

On balance, we believe that mortgage rates will start to decline before the start of 2023 and this decline will continue into next year.

There are signs that the money markets are already adjusting to a changing political outlook where stability in the UK’s public finances is an imperative.

The big unknown remains how much further central banks need to move on interest rates to bring inflation under control.

A recent speech from the Bank of England suggested markets were over-estimating how much higher interest rates will rise. Only time will tell.

What is clear is that mortgage rates are not going to return to the ultra-low levels of recent years.

Home buyers need to realise that mortgage rates of 4 to 5% are set to become the norm in future.

Spike in mortgage rates delivers a quick reality check for home buyers 

Many homebuyers are continuing with their agreed purchases.

Others did not expect to be buying with mortgage rates three-times higher than they were at the beginning of the year and are sitting it out for the rest of 2022.

That said, the broader motivations to move home will remain into next year.

These searches will largely be supported by pandemic factors, including the need for more space and a home office, as well as cost-of-living pressures, including the need for homes that are cheaper to heat and run.

For many households, a move will come down to what they can get for their current home and what this value unlocks for their next one.

Are house prices set to fall in 2023?

Any price reductions will come out of equity for most households but it can take time before everyone who wants to move accepts these pricing adjustments.

However, we expect this adjustment process will be quicker than normal, given the step change in the outlook and the scale of recent price gains.

House price index october 2022 - short term over-valuation of house prices unwinds over 2023

While the focus has mainly been on mortgage rates, it’s important to note that the labour market remains buoyant and on average, wages increased by 5.4% in the year leading up to August.

The proposed cuts to National Insurance and the government’s support for energy bills will also help to offset some of the financial pressures homeowners are currently experiencing.

The housing market in 2023 mainly looks set to be one of re-adjustment as we return to normal levels of mortgage rates.

How will the hit to buying power affect the market in 2023?

A rapid reversal in mortgage rates would have the greatest impact on buying power, enabling buyers to borrow for their next move without over-stretching themselves.

If a modest decline in house prices took place too, that desire to buy could be further accelerated.

Mortgage rates moving back towards 4% by the end of 2023 and a 5% fall in house prices would see most of the market’s current over-valuation reversed by December next year.

At present, we believe this will be the most likely outcome, accompanied by a modest decline in sales volumes from 1.3m to 1m in 2023.

Key takeaways

  • Mortgage rates look set to return to 4 to 5% next year – and these rates are set to become the norm in future. The days of ultra cheap money are behind us
  • Pandemic and cost-of-living factors will continue to drive the search for new homes in 2023
  • A 5% fall in house prices next year would see most of the market’s current over-valuation reversed by December 2023