House prices will fall by “around 2%” this year as mortgage rates ease, according to the Office of Budget Responsibility’s Spring Budget forecast.
This decline is less than half the 5% fall the spending watchdog estimated in its November report.
Mortgage rates have been on a downward path since the end of last year, although they have begun to edge up in recent weeks, as swap rates climb and the timing of Bank of England base rate cuts become more uncertain.
Last week, BoE chief economist Huw Pill said the central bank is still “some way off” cutting interest rates, currently at 5.25%.
The Monetary Policy Committee member added that he wanted to see “more compelling evidence” that inflation is being squeezed out of the UK economy and stronger signs of economic growth.
The UK fell into a technical recession last month after gross domestic product fell by a larger-than-expected 0.3% between October and December, after it had already contracted by 0.1% between July and September.
Financial markets are currently betting that the BoE’s first rate cut may not come until August – until recently it was anticipated that a cut would come in June.
Three 25 basis point rate cuts this year are no longer fully priced into the markets, at the end of last year, as many as six were expected in 2024.
The average two-year fixed residential mortgage rate today lifted two basis points to 5.78% from yesterday, according to Moneyfacts. The average five-year fix is unchanged at 5.34% over the same period.
However, the OBR says: “We expect house prices to fall around 2” in 2024, slightly under half of the 5% we expected in November.
“This is mainly due to our lower mortgage rate forecast.
“Supported by falling new mortgage rates, we then expect house prices to grow around 2% in 2026 and around 3.5% in 2027 and 2028.
“That would see nominal house prices surpass their historical peak in the first quarter of 2027.”
Office for Budget Responsibility chair Richard Hughes adds: “With global and domestic inflationary pressures easing, market participants now expect a sharper fall in interest rates than they did in November.
“But interest rate expectations have remained highly volatile since they started rising in the second half of 2022.”
The watchdog also expects inflation to fall below the Bank of England’s 2% target by the second half of this year, “helped by falling global energy prices and a cooling domestic labour market”.
The OBR adds that the UK economy will grow 0.8% this year and 1.9% in 2025, a more optimistic picture than the BoE, which expects an expansion of just 0.2% in 2024 and 0.6% next year.
