Halifax House Price Index: Prices fall 1.5% as affordability becomes a challenge

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“Britain’s property market slowed again in December, according to the latest Halifax House Price Index, with prices declining 1.5% on the month and the annual rate of house price growth easing to 2% from 4.6% as double-digit inflation, higher borrowing costs and falling real incomes dented affordability.

“Housing demand suffered a heavy blow in the wake of former Chancellor Kwasi Kwarteng’s disastrous mini budget, as many home hunters responded to much higher mortgage rates by putting plans to buy on pause.

“While the high mortgage rates seen in October have now eased and property prices are on the decline – potentially falling by 8% in 2023, according to Halifax, taking the cost of the average property back to April 2021 prices - affordability is still a challenge for many as prices are still above pre-pandemic levels and household finances continue to grapple with the wider cost-of-living crisis.

“November’s 20.4% drop in mortgage approvals – an indicator of future borrowing – was a further sign of dampening demand in the face of rising interest rates, double-digit inflation, the highest tax burden since the Second World War and the threat of job losses if the expected recession hits hard. But the economy might also experience a softer landing if some of the cost-of-living pressures continue to ease, such as falling energy prices, and unemployment does not rise substantially.

“Inflation is expected to halve over the course of 2023, but with more Bank of England interest rate rises expected in the months ahead to ensure price rises really are curtailed - potentially taking the bank rate to a peak of 4.5% from its current level of 3.5% - those looking to take on a new mortgage or to refinance should consider their options carefully in 2023.

“The good news is that 4.5% is lower than the 6% or more feared during the mortgage chaos late last year which could mean mortgage rates are close to topping out and should not jump much higher from here.

"But buyers still need to consider their options much more carefully than they did during the era of ultra-low rates, with those exiting fixed-rate deals in the next few months facing a hefty jump in repayments.

“A good independent mortgage broker can offer guidance for first-time buyers and those looking to remortgage on the best solution for their situation, such as whether a variable or fixed-rate mortgage works best. Variable mortgages are cheaper than fixed-rate deals now, however, they do track interest rates making it likely they will go up in the months ahead. Once rates hit their peak, however, variable rates may fall back again so it could result in short-term pain for long-term gain.

“For those that prefer the security of set monthly payments, locking in a new fixed deal makes sense but perhaps choose a shorter tenure to give yourself more options further down the line. Remember, you can secure a new product up to six months in advance of your existing deal expiring, something that may relieve anxiety for those that like to plan their finances for the full year.

“Whatever decision you make, remember the future is always uncertain with interest rates often dictated by global events such as the war in Ukraine and how the US Federal Reserve handles interest rates. With no guarantees on how the market will perform in 2023, some may choose to adopt a wait-and-see approach, while others are forced to sell as household finances get squeezed by higher mortgage payments.

“But those that can afford to take advantage of lower prices and the continuation of Stamp Duty cuts should push ahead, particularly if they have a solid mortgage offer in place, a chunky deposit, a secure job and plans to remain in their property for several years – giving the market time to recover from any downturn."