House prices in the UK are now falling

What's happened? The UK housing market continues to cool down, amidst slowing economic growth. Real house prices (adjusted for inflation) decreased by 4.21% in 2022 in comparison to the previous year, in sharp contrast to the 5.5% annual growth in 2021. It was the biggest year-on-year decline since 2008.
Demand and construction activity. Residential property deals (seasonally adjusted) in the UK fell by 14.9% year-on-year to 1.3 mln units in 2022, after rising by 42.8% in 2021, according to HM Revenue & Customs. In England, which accounts for more than three-quarters of all transactions, residential property sales fell by 15.5% to 1.1 million units in 2022 from a year earlier.

Despite slowing demand, the UK’s chronic housing shortage continues to push house prices in the country upwards, which is exacerbated by a decline in residential construction activity over the past two years due to coronavirus-related restrictions.

The government aims to build 300,000 new homes every year, but in 2021 there were only 216,490 new additional dwellings in England, which is 11% less in comparison with the previous year, according to the Ministry of Housing, Communities & Local Government. Then in the third quarter of 2022 completions of new dwellings fell further by another 4% on a yearly basis to 42,950 units.

Economy. The UK economy grew by 4% in 2022 from a year earlier, mainly as a result of the ongoing recovery from the pandemic-related weakness in 2020 and 2021, according to the UK Parliament. This happened after a huge 11% decline in 2020 and a strong growth of 7.6% in 2021.

Although this year the economy is likely to slow down sharply. The British Chamber of Commerce (BBC) expects the UK economy to avoid a technical recession but contract by 0.3% this year before returning to growth in 2024. The International Monetary Fund (IMF) is a bit more pessimistic, forecasting a 0.6% decline this year.

In February 2023, the Bank of England (BoE) raised its key interest rate by another 50 basis points to 4%, which was the tenth consecutive rate hike since December 2021 in order to meet the 2% inflation target. This is now the highest level since the end of 2008.

Source: Global Property Guide

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