According to analysts at Deutsche Bank, UK house prices are expected to experience a further 3% to 3.5% correction, resulting in a total decline of 7% from peak to trough by the end of 2023.

The Nationwide House Price index is currently down about 4.5% from its peak, however, the bank noted that this correction is less severe than those seen in other countries such as New Zealand. Despite this, the bank emphasized that the correction is not a crash, as it has not fully reversed previous gains.

The analysts outlined three key factors that are likely to impact house prices in the future –

First, unemployment levels, which had been stable,are expected to rise.

Second, as half of all borrowers in the market are on fixed-rate deals, the effects of interest rate increases will be delayed. The Office for National Statistics reports that around 1.4 million owner-occupiers will see the end of their fixed-rate deals this year, and some borrowers may choose to extend terms, shift to interest-only payments, or use savings to pay lump sums. However, Deutsche Bank warned that those without such options will face greater challenges, and the impact of higher interest rates will continue to affect the housing market and put pressure on prices.

Third, affordability is already stretched, particularly in London, and as interest rates remain high for a longer period, further downward pressure on prices is expected.

A spokesperson for Deutsche said, “With mortgage rates climbing to around 6%, we estimate that the average monthly mortgage payment would be about 50% higher than before – a sizeable increase. But it’s also worth noting that not all homeowners face refinancing costs. Indeed, the majority (54%) of owner-occupiers own their property outright.”

The bank also analyzed the impact of higher interest rates on debt servicing costs. For example, a £150,000 mortgage with a 25-year term would currently cost £636 per month at a 2% interest rate. However, if the interest rate were to rise to 4%, the monthly mortgage payment would increase to just under £800, and at a 6% interest rate, households would face a monthly payment of £966. The bank estimated that with mortgage rates climbing to around 6%, the average monthly mortgage payment would be approximately 50% higher than before.

Conclusion – While there’s expected to be a decline in house prices, experts don’t see it as a crash. There are some challenges ahead due to rising unemployment, interest rate hikes, and general affordability, but it’s essential to keep a balanced perspective, especially considering that many homeowners don’t even have mortgages.