Latest UK mainstream house price forecasts from property group Savills expect average values to rise by a total of 7.5 per cent in 2022 and 12.9 per cent over the five years to the end of 2026.

According to Nationwide, the average UK house price rose 5.0 per cent in the first four months of 2022, driven by a continued imbalance between demand and supply. While stock levels have begun to increase, this will underpin further price growth in the short term, despite the strengthening economic headwinds, says Savills.

But while macro-economics will continue to take a back seat in the immediate future, Savills says, affordability pressures will substantially moderate further price growth for the remainder of this year, as buyers become more budget-conscious and demand progressively eases.

The combination of extremely strong price growth over the past two years (+20 per cent to the end of April), rising interest rates and a cost of living squeeze, will combine to limit the capacity for growth over the following four years. Savills now projects that price growth in the next four years (2023-2026) will average a total of 5.1 per cent across the UK as a whole, with markets in the North of England growing most strongly.

The top end of the market, described as 'prime' (broadly the top five to 10 per cent by value), will also outperform the mainstream market, Savills says, due to a deep seam of equity and the fact wealthier buyers will be less impacted by the current economic conditions and rising interest rates.

"A lack of supply and strong buyer demand fuelled by the experience of the pandemic has turbocharged house price growth over the past two years, despite growing economic headwinds," said Lucian Cook, head of residential research at Savills.

 "This, combined with the rising cost of that borrowing and cost of living pressures, leaves less capacity for further price growth, especially within markets where borrowing is high relative to incomes..

"As a result, we have downgraded our projections for 2023-2026, and as part of this, anticipate modest price falls next year as the heat comes out of the housing market. But as things stand, we see nothing that points to a price correction. Affordability will be squeezed at the point of purchase, but interest rates are forecasts to remain low within an historical context and strong employment levels should serve to protect existing home owners.

"The key variables in our forecasts are the path of interest rates and whether the Bank of England follows through on recent proposals to relax stress testing of mortgage affordability. The removal or relaxation of the stress test could improve the outlook for prices. However, additional capacity for growth would be dependent on the precise terms of reform and how far lenders are prepared to push loan to income multiples in a higher interest rate environment," said Mr Cook.

Savills has based its forecasts on latest projections from Oxford Economics, a leading global forecaster. This assumes that the Bank of England base rate will not exceed 1.75 per cent by the end of 2026, with the annual rate of inflation falling rapidly in 2023.

"If interest rates rise higher than is currently being projected, capacity for price growth could be quickly eroded," added Mr Cook.