A plunge in British property prices next year is likely to leave almost a fifth of young homeowners living in a house worth less than their mortgage, according to the Resolution Foundation.

Some 16 per cent of homeowners between ages 16 and 34 will be trapped in so-called “negative equity” in 2023 if house prices drop by 7.9 per cent, as predicted by Lloyds Banking Group. The picture is also grim for those looking to buy a property, as borrowing costs soar and inflation sits at a 40-year high. 

Even in the bank’s worst-case scenario of 18 per cent price falls, nearly three-quarters of young non-home-owning families would not have the funds to purchase a house. UK broker Savills says UK rental values are set to jump 6.5 per cent next year as landlords pass on higher mortgage costs to tenants, further weakening the buying power of prospective homeowners.

The worsening outlook sheds light on the disruption looming over Britain’s housing market, as mortgage rates hover close to peaks last seen in the 2008 financial crisis. Bank of England Governor Andrew Bailey insisted that fixed-term mortgage rates shouldn’t need to rise in direct response to an interest rate hike last week, but it seems likely that homeowners will face persistently higher rates of 4-5 per cent in the coming years, which will weigh on property prices.

The Resolution Foundation said that current interest rate expectations mean young homeowners would face an extra £3,700 (S$5,905) in mortgage costs a year on average by the end of 2026, which is equivalent to 8 per cent of their household income. That’s more than double the hit facing homeowners above age 55, who will see a 3 per cent income knock.

Still, falling house prices may offer some benefits to the next generation of homeowners, the think-tank said. An 8 per cent dip would reduce the average amount of time needed to save for a 10 per cent deposit from 15 years in 2022 to 13 years in 2023, while overall lifetime costs of buying a house could fall back to their 2016 level of £275,000.

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Not all lenders are predicting price falls next year. Barclays and HSBC Holdings are more bullish in their base case forecasts, both predicting growth in UK property values in 2023. Banco Santander says a strong UK labour market will hold up home values. BLOOMBERG