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The residential sales market will still be challenging in 2024, but the outlook is more optimistic. Mortgage rates will remain elevated but have already fallen from the recent peaks. The base rate is forecast to start falling in the second half of the year. This will underpin sales activity and house prices. On balance, we expect a marginal fall in house prices and transaction volumes to be broadly level to 2023.

Key Takeaways

  1. Although the backdrop will remain relatively challenging in 2024, the outlook is certainly more optimistic. Falling inflation will drive an economic recovery and facilitate the loosening of monetary policy in the second half of 2024. This will underpin activity in the housing market.
  2. Robust wage growth and falling interest rates will also mean mortgage affordability improves throughout 2024. The mortgage market is also becoming increasingly more competitive, which will benefit homebuyers and those remortgaging next year.
  3. On balance, home sales won’t rebound significantly, but the improved backdrop will underpin demand. Transaction volumes will still be below the long-term average in 2024 but remain broadly level to 2023. Buyers' budgets will recover to an extent, albeit this won’t support house prices at their current level, with a further 1% fall forecast in 2024.
  4. In the short-term, new home completions look set to rise in 2024 compared with 2023. Still, several persistent challenges will result in a falling planning pipeline next year. However, the lower rate of construction cost inflation will at least provide some stability and improve development viability.

Outlook remains challenging but more optimistic 

The economy will start to recover in 2024 and we forecast inflation will fall to 2.8% by the end of next year. This is a boon for the housing market as it will ease the pressure on interest rates. We forecast the base rate to remain at its 5.25% peak in the first half of 2024, and then fall back below 5% by the end of the year. 

This improved outlook and more stable interest rate environment is already resulting in falling mortgage rates. The available financing has also improved, with the number of fixed-term mortgage products increasing by 60% in 2023. This means the market will be much more competitive in 2024. Some lenders, for example, are now offering mortgages at sub-5% in a bid to gain market share. 

Falling mortgage rates will translate into higher loan-to-income ratios in 2024. These were eroded at the start of 2023 as the base rate continued to increase but have now stabilised.  

However, the average loan size has increased, with the latest data inferring a purchase value of £334,000, surpassing the level at the start of 2023. At present, this is symptomatic of a market weighted increasingly towards higher earners, but it also partly reflects strong wage growth. 

Overall, this will support higher loans and boost buying power in 2024, particularly if base rate cuts come in the second half of the year as forecast. 

Figure 15: Average mortgage loan and loan-to-income ratio

Source: CBRE Research

The prospect of falling mortgage rates is positive news for the 850,000 two and five-year fixed mortgages renewing next year. And while payments will still rise, the prevailing rates are still well below what these borrowers would have been originally stress-tested at. In addition, strong house price growth in recent years means those remortgaging will benefit from lower loan-to-values, and hence lower mortgage rates. Other tools, including extending the mortgage term, will also be utilised to keep repayments as low as possible.  

The improved outlook moving into 2024 will underpin demand and house prices. We forecast transactions to stay below their long-term average, but to be broadly level with 2023. And although affordability will improve, prices will need to continue to correct to accommodate buyers’ budgets. We forecast a moderate fall in UK house prices of 1% in 2024. 

Housing supply will continue to come under pressure 

Just under 90,000 homes started construction in H1 2023, up 8% from the previous year. This indicates an improving short-term supply outlook of new home completions in 2024, albeit this is still significantly below the estimated requirement.  

However, the housebuilding sector will continue to be hindered by several challenges, which will impact the future pipeline of new homes in 2024. 

Planning remains a key challenge. New fire safety regulations are a necessity but will nevertheless stall planning activity throughout the year. In addition, the lack of local development plans mean councils will continue to be saturated with speculative planning applications. This will consume limited resources and contribute to delays. In London for example, it took an average of almost 18 months for a planning application to be granted permission in 2023, up from just over six months a decade ago. This has contributed to new home permissions falling almost 60% across the capital in 2023. 

The higher cost of debt and construction will also continue to impact viability. Almost two-thirds of respondents to the RICS Construction Survey now cite ‘financial constraints’ as a key factor limiting activity. This has risen consistently since the start of 2022. However, the pace of cost inflation should fall back in 2024, providing an element of stability. We forecast materials price inflation to average 3% in 2024, down from a peak of 23% in 2022. This will drive the overall rate of construction cost inflation down to an average of 2% in 2024, compared with the 2022 peak of 10%.  

Overall, the delivery of new homes may surpass 2023, but some key challenges will continue to impact the future planning pipeline throughout 2024. 

Figure 16: Private new home starts and material/construction cost inflation (actual and forecast)

Source: CBRE Research