UK house prices will fall by 8% next year, Lloyds predicts

Values could plummet by nearly 18 per cent in worst-case scenario as interest rate rises make property less affordable

The housing market has slowed down significantly (Anthony Devlin/PA) (PA Archive)

UK house prices will fall by nearly 8 per cent next year and then almost stagnate for four years, the UK’s biggest mortgage lender is forecasting.

But in a worst-case scenario, they could plummet by nearly 18 per cent, according to Lloyds Banking Group.

The FTSE-100 lender said it expected the UK economy to shrink by at least 1 per cent next year – and potentially by as much as 4.5 per cent.

Higher interest rates and the bleak economic outlook were likely to lead to a slowdown in mortgage lending over the next year, Lloyds said.

According to its forecast, house prices will fall by 7.9pc next year, but a worst-case model outlines a drop of almost 18 per cent.

Commercial property prices are forecast to drop by 15 per cent, or 36 per cent in the worst case.

Earlier this month, Halifax, which is owned by Lloyds, said the housing market had been almost flat since June but was now heading into a more significant slowdown as rapidly rising borrowing costs made buying a property unaffordable for more people.

Lloyds banking group, which announced pre-tax profits of £1.5bn in the third quarter of the year, has set aside £668m to cover bad debts.

House prices have soared to record levels since the start of the pandemic because with lockdowns, buyers wanted larger properties in rural locations.

Data from the Office for National Statistics shows the average UK home increased in value by 13.6 per cent in the year to August to £296,000.

The latest forecast flies in the face of predictions from other lenders this week, including Barclays, that UK house prices would continue to grow despite turbulence in the property market.

Lloyds said most of its mortgage customers would be able to withstand cost-of-living pressures.

"So far at least, our customers are proving to be resilient and adapting well to the cost-of-living increases that we have seen," said the bank’s chief financial officer, William Chalmers.

"We are deliberately ensuring that we lend to customers who are best placed to withstand potential future stresses on the macro level and in their own personal circumstances."

Mr Chalmers added that Lloyds’ lending was skewed towards "slightly better off" customers to ensure they could pay back their loans if conditions got tougher.

An 8 per cent drop in house prices would risk putting some buyers into negative equity.