House prices expected to plunge by 11% as 5% interest rate hike hammers the market

The UK housing market is expected to experience a shock fall in property prices until the second half of 2025, according to Oxford Economics.

Prices are expected to fall by 11% compared to their peak in 2022. The fall comes as the market feels the ripple of effect of the Bank of England’s (BoE) interest rates rise, now sitting at an uncomfortable 5% – pushing millions of homeowners into higher mortgage repayments.

In light of this, David Hannah, Chairman of Cornerstone Group International – the UK’s leading property tax experts – explains why the UK’s property market is on a cliff edge.

The gloomy outlook for the UK’s property market has been triggered by the continued rise of interest rates affecting borrowers as mortgage and loan costs are set to be higher. According to figures from UK Finance, 800,000 fixed mortgages will expire before the end of this year, and for those who renew their mortgages will spend an average of £2,900 a year in additional interest rate payments, as highlighted by think-tank, Resolution Foundation.

Landlords are also grappling with their lowest profits in 16 years, largely attributed to the continuous rise in interest rates and increased mortgage costs.

Estate agency Savills has revealed that due to the Bank of England’s base rate increasing 13 consecutive times, mortgage costs have elevated and subsequently squeezed landlords’ income. In the first quarter of 2023, net profits for buy-to-let investors plummeted to less than 4%, marking the lowest figures seen since 2007.

Data from Cornerstone Tax 2020 highlights the problems which landlords are facing as just 1-in-5 (20%) say their investment has been a profitable one. Concerningly, as more Brits look to rent due to the unaffordability of mortgages, an exodus of landlords are leaving the market, consequently fuelling supply and demand issues.

Chairman of Cornerstone Group International, David Hannah said, “Due to the decision from the Bank of England to raise interest rates to 5%, homeowners coming off fixed-rate deals and moving straight into a six percent mortgage are going to be unable to afford them. That’s going to lead to a load of repossessions and forced sales which is not good news. Fundamentally it’s going to shatter confidence in the market.

“Such an environment will lead to a slowdown in property sales, as well as a potential decline in property prices, impacting both existing homeowners and those aspiring to join the property ladder. Today’s announcement is also set to affect first-time buyers who may now be unable to make a first step onto the housing ladder due to unaffordable mortgage rates.

“The rise will also have a knock-on effect on the rental market too – it has already been suffering from a lack of supply, and now, with a growing number of would-be buyers in need of a place to live, this is going to be exacerbated further. The result of this is that rental prices and competition will likely increase at a time when people are already struggling.

“I think what should be considered is having a maximum cap on mortgage payments for homeowners, with the remaining amount of increased interest being added on to the balance of the mortgage. By doing this, more homeowners will be able to afford their monthly payments and it will mean more people and families can keep their homes. Everybody’s just about managing at the moment and if you look at the underlying factors that created this inflationary cycle, they’re not in the control of consumers.”