Why do house prices fall?

After years of soaring house prices in many areas of the UK, prices have started to fall in recent months, but what causes them to drop?

Lisa Parker
January 13, 2023
Why do house prices fall?

After years of soaring house prices in many areas of the UK, prices have started to fall in recent months, but what causes them to drop?Here, we look at some of the factors that cause house prices to fall, and how falling house prices can impact homebuyers and those looking to remortgage.

What causes house prices to fall?

There are several different factors which can cause house prices to fall. These include:

• Rising interest rates

The Bank of England has raised the base rate several times in recent months to try to curb inflation, with these increases feeding through to higher mortgage rates. When the cost of borrowing becomes more expensive, this reduces demand for property, which in turn lowers prices. Those who already own their homes can find it much harder to cover their monthly mortgage payments when rates are rising, especially if they are on variable rate deals and feel the impact of higher rates straightaway.

• Economic uncertainty

During periods of strong economic growth, people are more likely to be able to afford to buy property, as their incomes are usually rising. This pushes up prices as demand for property increases. Conversely, when the economic picture is gloomier, or we are entering a recession as we are now, affordability becomes more stretched, and those who already own property may struggle to keep up with mortgage payments.

• Unemployment

When unemployment rises, usually when the economy is contracting, fewer people can afford to buy property, which means supply can outstrip demand, pushing prices down. If people are worried about losing their jobs, they may choose to defer buying until unemployment rates reduce.

• Mortgage availability

Prior to the financial crisis of 2008, it was possible for buyers to borrow 100% of the property value. Lenders subsequently tightened up their lending criteria, introducing stricter affordability checks to ensure buyers could keep up with monthly payments, which led to prices falling as fewer people could get mortgages. The maximum amount you can now borrow is 95% of the property value. Mortgage availability fell again recently following the disastrous mini-Budget, with many lenders withdrawing deals and replacing them with much higher-priced deals. Fortunately, rates have since stabilised, so there is still the opportunity to get a good mortgage deal if you’re looking to buy or remortgage. You can use our online mortgage finder to calculate how much you can borrow and work out which deals you’ll qualify for. An expert will then recommend the best deal for you, and there’s no fee for this advice, so it won’t cost you a penny.

• Property supply

If there are more properties available for sale than there are buyers, property prices tend to fall. If, however, there is a limited supply of homes available, property prices usually rise, as there is competition between buyers to secure a property. In the UK there is a shortage of homes, and this one of the main factors that has helped support property prices in recent years.

Are house prices going to fall further?

No-one knows what will happen to property prices in the months and years to come It depends on what happens to mortgage rates, how long the current recession lasts for and what impact it has on employment, incomes, and consumer confidence in the months to come. Even if prices do fall, most homeowners who have owned their properties for a few years are likely to have benefitted from increasing values since they bought. This means that there is less chance that they will end up in a position of negative equity, where they owe more than their property is worth. If you want to know whether your property has fallen in value, Our house price calculator can give you an idea of how much your house is currently worth and how much its value has changed over the past year.

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