The recent rise in mortgage rates led to house prices becoming overvalued by 13% at the end of last year, Zoopla said, but this has since dropped to 8% as of the first quarter of this year
Average UK house prices are 8% overvalued but this number could drop once mortgage rates hopefully fall, according to Zoopla.
The portal’s latest House Price Index has evaluated the extent to which actual house prices are higher or lower than an ‘affordable house price’ calculated from household incomes and mortgage rates.
It takes the average household disposable income from the ONS and then calculates spending 25% on mortgage repayments, using average mortgage rates over a 28.8 year term to see how big a mortgage a buyer can afford compared with actual prices.
The recent rise in mortgage rates led to house prices becoming overvalued by 13% at the end of last year, Zoopla said, but this has since dropped to 8% as of the first quarter of this year.
Zoopla suggests this over-valuation will disappear, assuming that house prices increase 1.5% and mortgage rates stay at 4.5%.
Looking at market activity in the first four weeks of May, Zoopla said homebuyers are largely shrugging off the election with new sales agreed 8% higher, demand up 6% and a fifth more homes for sale than a year back.
Overall stock for sale is also 19% higher, indicating some could be overvalued.
There are indications that market activity is beginning to seasonally slow, Zoopla said.
Sales agreed were down slightly month on month across all regions, led by the North East (-6%) and West Midlands (-5%).
The report found that the annual rate of UK house price inflation is now steady at 0% in May 2024, up from a 1.3% decline in November 2023 and down from a 1.6% increase a year ago.
The average UK house price as of May 2024 was £264,900, the report suggests.
House prices continue to register annual price declines across southern England at a slowing rate, Zoopla said.
Price drops are currently greatest in the Eastern region (-1.4%) and South East (-1%), with Canterbury in Kent topping the list with the biggest price decline (-4.1%). Prices are rising by up to 3.3% in Northern Ireland and 1.5% in the North West region, with Sunderland experiencing a 5.2% price rise.
Overall, UK house prices are on track to be 1.5% higher at the end of 2024 as successive monthly price declines over the past six months of 2023 ‘drop out’ of the annual growth rate, the report said.
Zoopla said interest rates will be the key to how the market performs for the rest of the year.
The report said: Any cuts in the base rate over the summer and into the autumn will deliver a boost to market sentiment and sales activity, even though the impact on fixed rate mortgages will likely be more muted.
It added: Based on City forecasts for base rates, we expect mortgage rates to stay in the 4-4.5% range going into 2024. This is sufficient to support sales volumes and low, single digit levels of house price inflation.
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