Are house prices going to fall? Is this the end of buy-to-let? What’s going on in the housing market?

George Osborne was in full flow, and his target was house prices.

Addressing a group of students on his Project Fear tour of the United Kingdom, he sounded warning bell after warning bell about the damage that leaving the European Union would do to the British economy.

The students’ job prospects – worse. The income they could expect from the world of work – down. The cost of their favourite uni grub – up.

The message from the self-assured chancellor was having the intended effect.

That was, at least, until one doom-laden prophesy solicited an altogether different response.

“A vote to leave the European Union is a vote for house prices to come down by 19 per cent,” he said, hammering home his point to the room of Europhiles.

Cue raucous cheers from the mass of students who realised, even then, that there was a chance they could be forced to live a life on the wrong end of the UK’s rentier economy.

A market divided

Apocryphal or not, this eight-year-old anecdote reveals much about the divisive nature of the UK housing market. Falls in house prices are, as the Chancellor-turned-podcaster found out, welcomed by desperate renters with aspirations to one day get a foot on the housing ladder.

But among homeowners, whose house is often the main store of their wealth, a downward move in prices is, obviously, a cause for great concern.

A move in the market tends to prompt relief in one corner and dismay in the other.

This divide was the market’s modus operandi until this year’s stagnant market contrived to leave neither party happy.

House prices – which, according to the Office for National Statistics (ONS), have stayed at 8.3 times annual income for the last couple of years – are too high for many prospective buyers to have a hope of getting on the housing ladder.

And yet, the fact that values are still down on the high-water mark set in autumn 2022 means homeowners minded to sell are reluctant to do a deal at what they perceive to be a discount.

This stalemate looks to have extended into another month, according to new data from Nationwide and Halifax, two of the UK’s largest mortgage providers.

The mutual’s monthly House Price Index, one of the housing market’s most-watched indices, found house prices in March were up 1.6 per cent on the same time last year. And its month-on-month data, which it adjusts to reflect the housing market’s traditionally ‘hot’ spring period, was down 0.4 per cent.

Halifax’s index, which came out on Friday (5), painted a similar – albeit slightly more downbeat – picture, reporting a monthly fall of one per cent. London appears to have bucked the minor decline that took place nationally, with both indices showing house prices in the capital have risen.

This, combined with widespread uncertainty about anticipated rate cuts—how many, when, and by how much—has bred much speculation on the housing market’s direction. Throw in the added curveball (or not, as the case may be) of a general election, and the moving parts become even harder to pin down.

We take the temperature of a market that has confounded expectations and whose prospects divide opinion.

What has happened to house prices in the past year?

Fresh off the ignominious ‘Mini Budget’ of late 2022, property analysts went into last year bracing themselves for a turbulent year. With inflation cruising past 10 per cent, markets were pricing in a year of major rate rises, which, traditionally, brings house prices down because of the dampening effect on demand that more expensive mortgages have.

Yet, according to the ONS, the average house price in the UK only dropped by two per cent.

“House prices did not come down nearly as much last year as people expected,” says Richard Donnell, executive director of research at Zoopla. “We had one of the most optimistic forecasts, saying that house prices would only fall by five per cent in 2023, but in the end the fall was less bad even than we predicted.”

The end of year number was better than expected, according to Tom Bill, Knight Frank’s Head of UK Residential Research, partly because the market began to recover in December, putting a gloss on the final figures.

“The best way to describe what the UK property market has done in recent months is 10 weeks of recovery and then 10 weeks of drift,” he told City A.M. “The recovery began in the late stages of last year, as interest rate expectations shifted. Financial markets started to expect four or five rate cuts this year. Mortgage rates responded, and we saw some momentum pick up in the market.”

But despite headline inflation falling, hawkish noises from Bank of England have poured some cold water on this short-lived recovery leading to a more stagnated couple of months up to March. “Since the middle-end of January, things have moved sideways,” Bill continues.

“The market is drifting, not doing anything exciting, and everyone playing the guessing game on when that first interest rate cut is going to happen. Mortgage lenders have been hamstrung by the uncertainty, and Tuesday’s Nationwide data reflects that.”

Will house prices go up this year?

In addition to unanswered questions about where rates will end up, the market’s recent stagnation is also a result of holding up better than expected last year, according to Donnell. Because the housing market never fully reflected the higher rate environment last year, interest rates falling will unlikely prompt a major jump in prices.

“Without the price falls much of the market expected last year,” he explains, “it takes longer for the market to adjust to the cost of higher mortgage rates. So, even if rates begin to come down – and I do think people got slightly exuberant on interest rates – house prices just aren’t going to go up very much.”

Bill agrees: “We’re expecting prices to go up, but only by three per cent. There’s no major pressure in the system, particularly, so things will just tick along, slightly positive, but we won’t see double-digit growth for a while.”

But while prices are expected to flatline, one element of the housing market is seeing a sizeable uptick.

Mortgage approvals – the number of mortgages being granted by lenders – reached their highest rate in 17 months according to the Bank of England.

This is widely regarded to be good news. Not only suggests liquidity is improving in an area of the economy where transactions had been languishing thanks to sellers holding off for a recovery before accepting an offer. It also benefits the general economy, as house moves tend to involve big spending in other areas, such as renovations.

“Everyone should welcome a rebound in volume,” says Donnell. “When mortgage rates go up from two per cent to five per cent as they have done, it reduces people’s buying power by between 20 and 30 per cent. That’s not to say that house prices then fall by that much, but something needs to give and that tends to be volume rather than price. I do expect volumes to return to more normal levels this year.”

Will a Labour government affect the value of your house?

Osborne’s Project Fear tour of universities might have failed to prevent the country from deciding, but his party’s doom-mongering about the prospect of a Corbyn government played a major role in his party slumping to its worst post-war election.

Corbyn’s Labour Party had aspirations to tax gifts from parents which, rightly or wrongly, does a lot to hold up property prices. This, combined with several other radical plans outlined in Momentum’s Housing for the Many report, led to a jittery property market temporarily unsure of itself.

But under Starmer, who has positioned himself as a ‘YIMBY’ prime minister promising to build 300,000 homes a year, few of the same fears plague the market’s big players.

“At the last election, there was way more clear blue water between a Jeremy Corbyn-led Labour government and Boris Johnson’s Conservatives. Now, there’s just not a huge amount of difference between the two main parties. We expect Labour to carry on with the current administration’s rental reforms with a few tweaks, and getting the nation building more homes, which is the one main area of difference.”

These two priorities are unlikely to have a huge effect on the market and prices, though. “We’re not really expecting a change of government to have a meaningful impact on house prices,” says Knight Frank’s Bill. “House building and the supply of new build housing largely operate on an economic cycle rather than a political one – it’s primarily demand led. I’m not expecting a meaningful ramp up in delivery.”

Does this mean an end to turbulence for buy-to-let landlords?

One player in the housing market that made a disproportionate amount of noise about the damage being done by higher rates, were the by-to-let landlords (cue our students at the George Osborne talk reaching for their tiny violins).

The cohort, some of whom leapt on the historically low rates of 2010-2022 to hoover up rental properties, leaving themselves highly leveraged as they did so, is widely regarded to have particularly felt the squeeze.

However, in Donnell’s eyes, the gravity of their situation has been somewhat overstated. “Looking at the numbers, 40 per cent of landlords have got no mortgage at all, so higher rates have no impact on them whatsoever, albeit other costs might have gone up.

Of the 60 per cent with a mortgage, half of them – so 30 per cent in total – have a low loan-to-value mortgage [meaning the amount of borrowing they have taken out on their home is fairly low] and so won’t be too badly affected.”

Landlords who are suffering from a squeeze, Donnel argues, are likely to be based in London or the southeast, where yields, relative to the value of a home, are lower.