What is happening to the UK homebuying and rental markets?

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For Joe, a youth worker in his 20s, soaring rents have made living and working in London precarious.

“Our rent costs 50% of our combined wage before bills,” says Joe, who shares with his partner, a receptionist. They pay £1,450 a month for a “very small” one-bedroom flat. The couple’s tenancy agreement expired recently and they now have a casual agreement with the landlord to stay in the flat.

“If we were evicted we’d end up being unable to afford a similar property. We would have to move back in with our parents. I’d have to leave my job, as my parents live outside commuting distance,” he says.

Although rents are rising rapidly, with house prices starting to fall, the Bank of England raising interest rates to levels last seen in 2008 and Britain facing a long recession, signs increasingly suggest the housing market has peaked.

The Bank’s chief economist, Huw Pill, warned last week that there was “still more to do” to tackle soaring, double-digit inflation, despite the growing risks of a long recession. The central bank lifted its base rate by 0.75 percentage points to 3% in early November, the biggest single rise in borrowing costs since 1989. It will add about £3,000 a year to mortgage bills, on average, for households that are set to renew their mortgages. The money markets are predicting that interest rates will rise to 4.5% by May, and stay around that level for the rest of 2023, although expectations for peak rates have eased since the departure of Liz Truss and Kwasi Kwarteng. The Bank’s governor, Andrew Bailey, has suggested that the peak in rates may well be lower than that.

Here we look at the warning signs for the housing market.


Wages have failed to keep up with soaring house prices in recent years, making it harder for first-time buyers to save for a deposit, while years of cheap borrowing have come to an end.

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House prices to earnings

The price of new fixed-rate mortgages started to go up over the summer, and shot up after the Truss government’s disastrous mini-budget unleashed chaos in financial markets. The average two-year fixed jumped to 6.65% in late October, and is now at 6.35%, while the five-year fixed costs 6.12%, according to Moneyfacts.

Just over 2m mortgages, around a quarter of the total, come to the end of their fixed term by the end of 2023, and are “likely to be refinancing at much higher rates”, the Bank of England has warned.

Neal Hudson, a UK housing market analyst, said: “In isolation, these higher mortgage rates would cause hardship for some households, but the impact on the wider housing market and economy could be managed.

“However, alongside higher mortgage rates, there is the cost of living crisis, with high inflation and increasing energy costs alongside rapidly rising rents. And it now looks like we can add public spending cuts and pay caps to the list. The prospects for the housing market and economy are looking scary – and any deterioration in one will feed through to the other.”

The number of UK homes repossessed rose by 15% to 700 in the third quarter from the second, the banking body UK Finance reported last week. However, they remain at low levels, as this is only about half the total of 1,340 in the third quarter of 2019.

House prices have started falling …

Nationwide, the country’s biggest building society, said the average UK house price fell 0.9% in October from September to £268,282, while Halifax, another major mortgage lender, reported a 0.4% monthly dip in values, and annual house price growth has slowed sharply. The Royal Institution of Chartered Surveyors reported that house prices stalled last month after more than two years of growth. The latest Office for National Statistics data show annual house price rises easing to 13.6% in August, from 16% in July.

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House price indices chart

Pointing to further weakening ahead, mortgage approvals for house purchases dropped to 66,800 in September from 74,400 in August, the Bank of England has reported.

… and values are expected to drop more sharply in 2023

NatWest Group has forecast that house prices will drop by 7% next year, while the EY Item Club, an economic forecaster, expects price declines of between 5% and 10%.

Transactions and house prices chart

Matthew Pointon, a senior economist at the consultancy Capital Economics, said: “With mortgage rates set to remain over 5% in 2023, demand will remain depressed and lead to a 12% peak-to-trough fall in house prices” over the next 18 months.

The property agent JLL noted that house price crashes have been rare in the UK; prices fell 20% during the early 90s recession and by 15% during the 2008/9 financial crisis. It predicts that prices will decline by 6% next year.

“This is not 2008,” says Kallum Pickering, a senior economist at Berenberg Bank. “Most mortgage debt sits with those households who have ample savings buffers and can afford higher interest costs without breaking the bank.”

He says the quicker-than-expected housing market correction means the Bank does not need to do much more tightening. “If the Bank stops hiking soon, further falls in mortgage rates should contain the risk of a massive collapse in house prices of 15% or more.”

Analysts say a big wave of repossessions looks unlikely, as lenders will do what they can to avoid them. Banks have been preparing for rising loan defaults, with HSBC setting aside £965m, and Lloyds Banking Group £668m. “But there could be an almighty consumer spending shock building on top of the cost of living crisis,” says Hudson.

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New-build house sales have slowed sharply

Three of Britain’s biggest housebuilders – Persimmon, Taylor Wimpey and Redrow – have reported sharply slowing sales and higher cancellation rates in recent weeks. Aside from the worsening economic outlook, the government-sponsored help to buy programme, which accounted for a big chunk of sales, is about to end. Housebuilder shares have plummeted in the past year as investors take a dim view of their prospects.

Housebuilder shares chart

Rents have reached record highs

Average private monthly rents reached a record high of £1,162 this quarter as tenant demand far outstripped the supply of homes to let, forcing more people to downsize to studio flats, according to the property website Rightmove.

Advertised rents chart

The average advertised rent in Greater London, of £2,343, was 16.1% higher than a year ago, the highest rate of growth of any region on record. However, some cities and towns have faced even bigger annual rises: 22.2% in Newbury, 20.5% in Manchester, 19.6% in Cardiff, 18% in Edinburgh and 17.6% in Birmingham.

Private renters are twice as likely as homeowners to suffer symptoms of anxiety, according to research from the Joseph Rowntree Foundation.

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