House prices will continue to rise, despite interest rate pressure

Could this be the tail end of the housing market boom?

While property prices are still forecast to rise during the next five years, the independent Office for Budget Responsibility (OBR) believes the current boom is coming to an end.

By 2026, the OBR believes house prices will rise at 3.5% a year, with mortgage costs and rents also growing during this period.

As a result of these official forecasts, first-time homebuyers face more difficult decisions.

Property preferences have changed significantly during the pandemic, with buyers reconsidering their living arrangements and locations.

With a limited supply of property and increased demand, prices have risen.

The OBR described buyer behaviour in the property market as a “race” for more indoor and outdoor space. Combined with the stamp duty holiday and a significant increase in demand, property transactions and prices increased.

This latest surge in property prices is expected to slow down. Still, the OBR thinks that property prices will continue to rise during their five year forecast period, with their latest forecast for price growth higher than published in the Spring Budget.

During their previous forecast in March, the OBR had forecast a near-term fall in house prices, but they no longer believe this will happen.

The OBR forecasts house price inflation of 8.6% in 2021, slowing to 3.2% in 2022, and then 0.9% in 2023.

The OBR is forecasting house price growth of 1.9% in 2024 and 3.5% in 2026.

Laura Suter, head of personal finance at AJ Bell, said:

“Homeowners need to be aware that it is a case of if, not when, for an interest rate rise now and the clock is ticking on the record low mortgage rates we’ve all become accustomed to.”