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UK House Prices Braced for Deeper Drop, Knight Frank Reveals

Contrary to previous predictions, Knight Frank anticipates a sharper plunge in UK house prices this year. They have revised their forecast, now expecting a 7% drop as opposed to their earlier 5% estimate. This comes in spite of subtle positive shifts in the UK’s economic landscape.

In explaining this alteration, Knight Frank points to the end of the era of exceptionally low borrowing costs. “The cost of borrowing has risen after an exceptional period that followed the global financial crisis, when rates hovered close to zero for more than a decade,” the firm stated. They further elaborated that those involved in the housing market over the past year and a half have grappled with market fluctuations stemming from the mini-budget and inconsistent inflation data.

Prime central London (PCL) is anticipated to witness a less pronounced adjustment due to factors such as higher cash sales, prices still lingering 15% below the mid-2015 peak, and the resurgence of international travel. Knight Frank holds their PCL forecast constant but predicts a milder decline for prime outer London (POL) of 3% in 2023, with a gradual recovery expected from 2026 onwards, fueled by a more domestic, needs-driven demand.

The agency foresees a 7% price drop in Country markets this year, which is steeper than their March prediction of 5%. This adjustment arises from the Country markets’ elevated starting position, influenced by the pandemic, in relation to London. Remarkably, even after the anticipated price drop, Country prices would still exceed the Q1 2020 levels by 6.7% and would remain 3.4% above their pre-pandemic benchmark at the close of 2024, factoring in a subsequent 3% drop in 2024.

Switching the focus to rentals, Knight Frank projects more robust growth in the PCL and POL sectors, driven by a longer duration to achieve equilibrium between supply and demand. They highlight the departure of several landlords from the sector in recent times due to escalating taxes and amplified regulatory requirements. However, they observe a trend towards balance in the London prime market, as several property owners opt for renting due to the uncertain price trajectory. Consequently, the consultancy predicts a 23.9% and 23.3% surge in rental values for PCL and POL respectively by 2027.

Recent data from the ONS underscores the nation’s robust annual rental growth at 5.5% in August. Multiple factors, including a robust labour market, job creation, and increasing mortgage rates, continue to drive rental demand. Given the enduring supply-demand mismatch, Knight Frank projects further rises in rental prices, adjusting their 2023 growth forecast to 6.5%, followed by an additional 5% hike in 2024.

Mortgage lender Nationwide’s recent figures shed light on the current housing situation. They indicate that September’s UK house prices were 5.3% lower compared to the same month the previous year, paralleling the decline seen in August – the steepest annual dip since 2009. Moreover, September experienced a static month-on-month price pattern, following a 0.8% reduction in August.