House prices are expected to fall by 5% over the coming year, with the gap in property price growth between the south of England and the rest of the country widening.

Price growth plummeted to just 0.6% in the 12 months to June, according to Zoopla’s latest house price index, as higher mortgage rates lead to a sharp fall in demand.

In June last year, house price inflation was at 9.6%.

Homebuyer demand for homes has fallen by 18% over the past two months as rising mortgage rates continues to adversely affect buying power.

This decline in demand is less stark than that recorded after the 2022 mini-budget but year-on-year is down by over a third (40%). However, committed buyers and sellers remain in the market with sales agreed only 17% lower than this time last year.

But for homeowners in Southern England the effects of higher mortgage rates is having a greater impact on buying power where house prices are highest, and as a result house prices are falling up to 0.6% across all four regions (South East, South West, South East and London). This is in stark contrast to the rest of the country where house prices in more affordable areas continue to register annual house price growth of over 1% – peaking at 1.9% in Scotland.

This regional divide is only set to widen in the second half of 2023 with further price falls expected across higher-value markets.

Areas in South East England are experiencing larger price falls, particularly in commuter markets such as Southend (-1.5%), Watford (-1.2%) and North West Hertfordshire (-1.1%), whilst prices are also falling in some lower-value markets such as Sunderland (-1.7%) Aberdeen (-0.9%) and Northern Ireland (-0.8%). In these areas, local economic factors are impacting demand in addition to mortgage rates and cost-of-living pressures.

House prices continue to increase at an above-average rate in affordable markets next to major employment centres., with the highest rate of annual price growth in Halifax (4.3%), Wolverhampton (3.7%) and Falkirk (3%).

Higher house prices mean larger mortgages, bigger deposits and a higher household income to buy. With more households priced out of the market, reducing demand and pushing prices lower, some would-be buyers are delaying moving – sales volumes are expected to be a quarter (23%) lower in 2023 compared to 2022.

Buyers are also shifting to buy smaller, lower value homes. As a result, new sales of three and four bedroom family homes are down by up to 41% when compared to the same time period (the last four weeks) over the last five years.

Richard Donnell, executive director at Zoopla, said: “Higher mortgage rates have hit home buyer demand once again after a sustained improvement over the Spring as mortgage rates fell to 4%. House prices increased slightly over the last 3 months to June but higher mortgage rates and weaker demand mean we expect a return of modest price falls in H2. Overall we expect prices to be 5% lower by the end of the year, still 15% higher than pre-pandemic levels.

“The impact of higher mortgage rates is far from uniform across the country. It all depends on housing affordability in local housing markets. Activity levels and prices in Southern England have been hit hardest by higher borrowing costs while the most affordable parts of the UK continue to see prices rising slowly.”