Down They Go - House prices to drop to mid-2021 levels says agency

Knight Frank says it expects house prices to drop in the coming year - but only to those levels seen in mid-2021.

Tom Bill, head of residential research at the agency says: “We expect UK prices to revert to where they were in the summer of 2021, however low levels of unemployment and well-capitalised banks mean we do not expect the sort of double-digit price declines seen during the global financial crisis.

“The stamp duty cut announced in the mini-Budget may even help liquidity to some degree. Any benefit was quickly eclipsed by the prospect of higher mortgage costs.”

The Knight Frank price prediction comes in what is otherwise a relatively upbeat assessment of the economy in the light of Rishi Sunak’s ascendency to 10 Downing Street.

Bill says that given the central role that spiralling mortgage rates played in the downfall of former Prime Minister Liz Truss, what happens next in the UK housing market will resonate strongly with the electorate: he predicts two stages of activity.

First, Bill says Sunak will need to wind back the clock and restore the confidence of debt markets. “After three days in office, there was evidence that the impact of the mini-Budget was close to being reversed” says Bill, noting that the five-year swap rate - which is used to price most UK mortgages - was hovering around 4.5 per cent at the end of last week, just above its level before former Chancellor Kwasi Kwarteng got to his feet to outline the government’s economic plan on September 23.

The Knight Frank residential chief says there are still plenty of potential pitfalls but there is evidence that stability is returning to the markets - and once that happens there will be a second phase of activity.

“More certainty will underpin transaction volumes but not necessarily prices. In fact, higher trading volumes would only hasten the price correction we expect will take place. As mortgage rates normalise and more people roll off five-year fixed-rate deals, this will continue to put downwards pressure on prices” anticipates Bill.