New research from Capital Economics shows that London house prices are set to fall by 12% over the next two years as buyers start to feel the full effects of increased interest rates and the cost of living crisis. The average house price in the UK will experience a 7% drop by the end of 2024 – according to the research – with house prices in the capital falling significantly more than in the rest of the country,due to being more unaffordable compared to average earnings.

Recent research from the Office for National Statistics (ONS) has revealed that the annual rate of UK house price growth has slowed sharply, falling from 12.8% to 7.8% in a month. However, the same report also showed the value of the average home increased by £3000 in June, bringing up the price to £286,000. Now, it seems that soaring interest rates – in response to the country’s severe inflation woes – could start to weigh down the housing market in the second half of the year.

However, properties in the UK are now more unaffordable than ever, with recent figures released by the Office for National Statistics showing that the average home sold in England cost the equivalent of 8.7 times the average annual disposable income – which is the worst affordability ratio in England since records began in 1999. There are signs of an increase in supply however, with the number of sellers in the property market increasing by 13% compared to this time last year according to Rightmove, although the number of available homes for sale remains 40% lower than in 2019. There are a myriad of obstacles facing the UK property market that have caused anxiety within the property world and worries of a market crash mirroring 2008 are prevalent.

David Hannah, Group Chairman at Cornerstone Tax discusses if the property market is ready to slow down:

“I think we are going to start to see the rising interest rates and cost of living crisis affect the UK property market. Over the next few years there is a possibility that houses – especially in the capital – will become even more unaffordable than they already are. Properties in the UK are already more unaffordable than ever and the open market we have in the UK could cause it to become worse. Property in the UK represents an exciting opportunity for foreign buyers because of the drop in the value of the pound. UK house prices continue to rise at a staggering rate domestically, being pushed higher by factors such as the influx of oversea investors. In the past, factors such as the stamp duty holiday have caused more people to consider buying property. However, due to the increase in average house prices, it has made it more difficult than ever for buyers to purchase their first property.

“The problem we do have is the rate of demand and supply. If builders are building and they’re over supplying, it will soften the increase and the appreciation in asset value. But, if the number of people wanting to buy houses continue to exceed the supply, then those prices are going to rise. We also have an open market in the UK which means not only are domestic purchasers and investors looking to buy, but we also have inbound investors. This means that even if demand cools domestically, international buyers could contribute to keeping prices high.”

Simon Bath, CEO of iPlace Global, explains that the housing market could become more affordable if the cost-of-living crisis worsens:

“Whilst I don’t believe we will see a fully-fledged housing market crash, I do believe that prices will start to fall further as the cost-of-living crisis worsens and inflation continues to rise. With energy prices predicted to rise another 65% in October, people simply will not be able to afford the mortgage repayments on a lot of properties that they may have been able to manage previously.

“July’s 0.1% decrease in average house prices doesn’t sound like much, but it’s hugely significant as it marks the first time in more than a year that prices haven’t increased. For first-time buyers, the market is hugely daunting at the moment and until prices decrease, people would benefit hugely from something being reintroduced like the Help to Buy scheme. There’s a real absence of support at the moment which is leading to people being reliant on the Bank of Mum and Dad in order to get on the ladder.”