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The primary factor contributing to the current overvaluation in home values has been the rise in mortgage rates over the past 18 months. To rectify this situation, house prices need to experience a further decline, accompanied by an increase in incomes, or alternatively, mortgage rates should decrease to restore affordability and stimulate demand or sales.

In our forecasts, we project that mortgage rates will decline to 4.25%-4.5% by the conclusion of 2024, maintaining that level through 2025. We expect a 2% average decline in UK house prices during 2024. With the number of homes for sale reaching a 5-year high, sellers will need to adopt competitive pricing strategies to facilitate serious sales, thereby keeping pricing under pressure.

The growth in household incomes in 2024 is expected to bolster affordability but may leave housing slightly overvalued by the end of the year. However, the overvaluation can be mitigated by households opting for longer mortgage terms. The outlook is contingent on the trajectory of mortgage rates and how lenders assess affordability throughout 2024.

Why haven't house prices fallen more?

Contrary to expectations, house prices have held steady in 2023, defying predictions of a substantial decline. The economy is experiencing gradual growth, with low unemployment and rising incomes contributing to this resilience. 

Lenders are actively assisting customers in refinancing, thereby limiting the number of individuals compelled to sell their homes. The implementation of stricter mortgage affordability tests since 2015 has also bolstered the market's stability. These measures prevent households from taking on unsustainable levels of debt, which, in the past, could have driven house prices to unsustainable heights. 

Consequently, the risk of double-digit price falls has been mitigated, especially as demand wanes. Even though new mortgaged buyers may secure loans at a mere 2% interest, they are required to demonstrate their ability to afford a 7% rate to their banks.