House prices dip in May, but confidence rises

House prices continue to adjust to the impact of higher mortgage rates and rising living costs. Buyer confidence has improved, and sales have increased in response to falling mortgage rates and a strong labour market.

Zoopla expect prices to remain broadly static for the rest of the year but recognise that higher-than-expected inflation data has increased the probability of further interest rate rises. 

The research suggests that this will have a knock-on effect on mortgage rates which appear likely to edge higher in the coming weeks. This would reduce buying power and demand for homes in H2 and the impact depends on how much rates increase.

The increase in housing market activity this year is down to average mortgage rates falling back towards 4% in line with the underlying cost of finance. 

Zoopla insist that the latest inflation numbers have increased the likelihood that interest rates may need to rise further to cool inflation which means an increase in mortgage rates in the near term.

Improving levels of housing activity over the last two months prove that 4% to 4.5% mortgage rates are generally manageable for new homebuyers. This is despite them being more than double the lows of late 2021. However, higher living costs continue to erode spending power at the same time.

Zoopla’s assessment is that mortgage rates of 4-5% are consistent with house price growth of +2% to -2% and circa 1 million sales a year, so long as we continue to see a strong labour market.

Richard Donnell, executive director – research, Zoopla, commented: “Falling mortgage rates in H1 2023 have supported increased market activity.

"Expectations that interest rates need to rise further to control inflation will push up mortgage rates. This is likely to result in weaker demand and levels of market activity in H2 2023.”