With the Bank of England expected to increase Bank base rate later today (November 3), Savills has issued new five-year house price forecasts for both the prime and mainstream markets.

As borrowing costs rise, the housing market will diverge between the mortgage-dependent mainstream markets and the prime markets, broadly the top 5-10 per cent by value in each region, the firm says.

After over two years of strong growth, the average UK house price is expected to fall by 10 per cent in 2023 when interest rates peak, but the prime markets will see smaller falls and outperform over the five year forecast period.

There will be a growing divergence between cash and equity rich or cash buyers and other groups in their ability to transact, and between the mainstream market and prime markets where housing wealth is most concentrated.

As an example, prime central London values are expected to fall by just -two per cent in 2023 and rise by a net 13.5 per cent by the end of 2027.

"The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation," says Lucian Cook, Savills head of residential research.

"A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers' budgets. That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10% next year during a period of much reduced housing market activity.

"There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis. Borrowers who haven't locked into five-year fixed rates had their affordability heavily stress-tested until August this year. This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.

"And looking longer term, the Bank of England's relaxation of mortgage regulation over the summer has substantially enhanced the prospect of a price recovery; but only as and when interest rates start to be reduced, once inflationary pressures in the wider economy ease.

"Meanwhile, rental value growth will continue to outpace earnings growth in the short-term because of the pronounced imbalance between supply and demand, which will come as positive news to landlords already facing higher borrowing costs, but will put increasing pressure on struggling tenants."