Analyst raises house price expectations but warns correction isn’t over

The UK and Europe’s “house price correction” isn’t over yet but the market will perform better than expected, a ratings agency claims.

S&P Global Ratings has revised upwards its housing price forecasts for the European market, particularly in the UK, Ireland, Spain and Portugal, citing “improved price resilience.”

It had expected UK house prices to drop 1.5% in 2023 but now believes they will have increased 5.1%, while it is expecting a 5.9% rise in typical values this year, up from 1% previously forecast.

S&P Global ratings highlighted supply and construction costs as factors keeping prices high.

However, the report highlights that the “adjustment of prices to higher interest rates” isn’t over and believes the bottom of the house price cycle is still ahead.

It is assuming that central banks won't start cutting rates as early as financial markets are anticipating and is expecting European central banks in developed Europe to wait until mid-year rather than start cutting in early Spring. 

The analysis said: “We have revised upward our housing price forecasts amid improved price resilience across the European market. - Despite this revision, we think the price correction is not yet over. Demand will slow further and supply constraints continue to ease.

“Supply factors are the main driver of house price resilience, alongside a strong labour market, backlog demand, government support, and still-high construction costs, while we see the price of new homes increasingly decoupling from that of existing homes. 

“While some mortgage rates reflect the lower 10-year bond yields at the start of 2024, we do not think they will see a sustained downward trend before mid-year, because we think central banks will cut rates later than markets are currently pricing.”