Lloyds warns house prices could crash 18% next year

House prices are set to slide for the next two years as higher mortgage rates bite, Lloyds Bank has warned. 

After pandemic lockdowns fuelled red-hot activity in the property market, Lloyds is now expecting house prices to fall by 7.9 per cent in 2023 and 0.5 per cent in 2024, before picking up again in 2025. 

In a ‘severe’ economic slump, the bank added, prices could fall by 17.9 per cent next year and keep slipping until at least 2026. 

While lower house prices could prove painful for homeowners trying to sell, they will be welcomed by first-time buyers. William Chalmers, the banking group’s finance boss, said: ‘We’re likely to see a bit of a slowdown in mortgage lending over the course of the next 12 months in response to slightly higher interest rates and the slightly tougher macro-economic environment.’ 

Economists have raised the alarm about falling house prices as interest rates shot up, making mortgages more expensive. 

The Bank of England has been hiking rates since December and is expected to act again next week, bumping up its base rate from 2.25 per cent to 3 per cent. 

Mortgages are also affected by yields on gilts, effectively the interest payments which investors demand to lend to the Government. 

Gilt yields shot up in the aftermath of Kwasi Kwarteng’s mini Budget as markets worried how much the Government would have to borrow to fund tax cuts. 

This pushed mortgage rates above 6 per cent following the ex-Chancellor’s mini-Budget, from just over 2 per cent a year earlier. 

Though gilt yields are now back to where they were before Kwarteng’s statement, mortgage rates have been slower to fall back. Chalmers said Lloyds would see how markets settled ‘in order to determine what the appropriate pricing strategy is to respond to that’.

It came as Lloyds raked in profits of £1.5billion in the three months to September, boosted by rising interest rates. 

A higher base rate set by the Bank of England means lenders can charge borrowers more, but not lift savings rates by as much – pocketing a bigger profit on the difference. 

This so-called net interest income at Lloyds hit £3.4billion in the three months to September, up 19 per cent on the previous year. Profits were weighed down by the bank setting aside £668m to prepare for loans turning sour as the economy fell into a downturn. But so far, the bank said, it was seeing little sign of customers struggling. 

The price of an average UK house hit a record of £296,000 in August, according to the Office for National Statistics, up £36,000 from a year earlier. But the pace of growth has slowed, from 16 per cent in the year to July to 13.6 per cent in the year to August. Lloyds shares rose 0.5 per cent, or 0.23p, to 42.78p.