UK house prices are overvalued, which suggests that they will drop in some regions across the country. But, the big question is how far do prices need to fall? And where are prices most overvalued?

New data from Zoopla this morning shows that UK house prices are currently 8% ‘overvalued’ but will be ‘fairly valued’ by the end of the year due to rising incomes.

Zoopla has a long run model that tracks whether UK house prices are too expensive or fairly valued. This, the property portal says, highlights how UK home prices were more than 50% over-valued in the run up to the global financial crisis in 2007, and even more over-priced in the late 1980s housing boom. In both these cases, economic recession led to double digit house price falls.

Latest analysis finds that the jump in mortgage rates over 2023 led to UK house prices becoming over-valued by 13% at the end of 2023. This over-valuation of home prices explains why there have been modest annual price falls over the last year compared to previous periods.

Currently, UK house prices are estimated to be 8% over-valued (Q1 2024) but by the end of the year, this over-valuation will disappear, assuming that house prices rise 1.5% by the end of this year – which Zoopla thinks will happen – and mortgage rates remain at 4.5%. Rising incomes and longer mortgage terms are helping to improve affordability which will, in turn, support the continued improvement in sales volumes and single digit house price growth over H2 2024.

In contrast to reduced sales throughout 2023, Zoopla data shows that the market remains on track for 1.1 million sales in 2024. 75% of these sales expected in 2024 are either completed or agreed and working toward a completion – with a quarter of a million sales yet to be agreed. The 1.1 million sale figure is 10% higher than 2023 but still below the 20-year average, however rising sales are positive and show more realism on the part of sellers and renewed, cautious confidence amongst buyers.

Looking ahead, Zoopla reports that the near-term outlook for the sales market will depend on the outlook for mortgage rates which are a function of the outlook for interest rates. Based on city forecasts for base rates, mortgage rates are expected to remain in the 4-4.5% range which is sufficient to support sales volumes and low, single digit levels of house price growth.

House prices in the south of England are expected to continue to under-perform the UK average as they re-align with incomes as income growth is the key to supporting sales and demand into 2025.  Price falls are currently greatest in the Eastern region (-1.4%) and South East (-1%), with Canterbury in Kent topping the list with the biggest price fall (-4.1%). Prices are rising by up to 3.3% in Northern Ireland and 1.5% in the North West region, with Sunderland experiencing +5.2% price increase..

Richard Donnell, executive director at Zoopla, said: “The housing market continues to adjust to higher borrowing costs through modest house price falls and rising incomes.  Buyers using mortgages are also relying on longer mortgage terms to gain that extra few percentage points of buying power to afford a home.

“The general election campaign has had a limited impact on market activity although the seasonal summer slowdown is arriving. Sales agreed continued to increase and more homes for sale means more buyers looking to move in the second half of the year. The timing of the first cut in the base rate is a key moment and will give a boost to both market sentiment and sales activity. Overall we expect house prices to be 1.5% higher over 2024.”