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House prices set to drop 9% in next two years - how OBR sees each year playing out until 2027

House prices are set to fall by 9% over the next two years due to higher mortgage rates and an incoming recession. But then what?

After that, they are expected to then begin to rise again, the Office for Budget Responsibility (OBR) forecasts.

House prices are still likely to end the year 10.7% up on the previous 12 months despite the recent slowdown in the market. But they will fall 1.2% in 2023 and 5.7% in 2024, the Government's official forecaster said.

Average interest rates on mortgages will peak at 5% in the second half of 2024, it predicts. This is the highest level since 2008 and so will severely impact what people can afford when looking to move up the property ladder.

The house price drop may provide some relief to first time buyers, but a slowdown in the market may see a reduction in available stock, plus it will be more expensive to borrow.

Rising unemployment will also push down house prices, the OBR said.

However, property prices will start to recover in 2025 with a 1.2% uptick, a 3% rise in 2026 and 3.5% rise in 2027.

The OBR did issue a word of caution on its later predictions saying there was "significant uncertainty" over the forecast “given the sensitivity of house prices to mortgage rates and the recent volatility in the bond yields that drive pricing in the mortgage market”.

When the market does pick up again in 2025, house prices will rise slightly faster than normal incomes. A house will cost on average seven times someone's earnings.

House prices soared after the coronavirus lockdown after a stamp duty holiday was launched and families needing more space to work from home looked to buy bigger properties while interest rates were still low and they had saved money.

In a bid to beat the stamp duty holiday deadline of October 1 2021, many paid asking or above asking prices, inflating the average house price.

An indefinite cut to stamp duty was announced by previous Chancellor Kwasi Kwarteng in September this year, but current Chancellor Jeremy Hunt imposed a deadline for the new rates - March 31 2025.

Under these new benchmarks, no stamp duty will be applicable on the first £250,000 of a new property, up from £125,000. First time buyers see their threshold raised from £300,000 to £425,000.

It is hoped the holiday will keep the housing market moving, but critics are frustrated there is once again a time limit. Richard Donnell, executive director of research at Zoopla, added: "The Government's announcement of a reversal of the recently announced stamp duty changes in 2025 signifies a real need to reform stamp duty - a tax that is now starting to resemble income tax where it's the top tax bands generating the greatest receipts.

"This reversal will make it increasingly difficult for prospective first-time buyers to get on the housing ladder in the coming years, particularly in London and the South East which account for the majority of stamp duty receipts."

David Hannah, group chairman at Cornerstone Tax, said: “At this point in time, the housing market is extremely sensitive, and the future of it hinges on consumer confidence, as well as the level of stock. It's clear that aspiring homebuyers currently stuck in the renting cycle will continue to be the most affected by the turbulence of the market, especially with today’s announcement revealing that the stamp duty cut is set to continue until 2025."

However, Iain McKenzie, CEO of the Guild of Property Professionals, was more positive about the future. He said: "There may be some realignment in pricing to adjust for the rising cost of living but the market will recover."

Erin Yurday

Erin Yurday is the Founder and Editor of NimbleFins. Prior to NimbleFins, she worked as an investment professional and as the finance expert in Stanford University's Graduate School of Business case writing team. Read more on LinkedIn.