Lloyds said on Wednesday that while prices would drop over the next two years, longer term growth would be steady with prices increasing 0.6% by 2027
Halifax-owner Lloyds Banking Group forecasts house prices will decline 4.7% in 2023 and by a further 2.4% in 2024 before recovering.
Lenders have blamed higher borrowing costs for a drop in house sales.
But the average house price remains around £40,000 higher than at the height of the pandemic when prices surged, as people working from home sought more space.
Lloyds said on Wednesday that while prices would drop over the next two years, longer term growth would be steady with prices increasing 0.6% by 2027.
Interest rates are currently at 5.25%, their highest level for 15 years, driven by a series of rate hikes aimed at tackling surging consumer prices.
As a result, lenders have increased their borrowing rates, including for mortgages. The latest figures show the average rate on two-year fixed is 6.24% on average, as per financial information service Moneyfacts.
Lloyds’ prediction is based on the Halifax House Price Index, which excludes figures for cash buyers that currently make up more than 30% of housing sales.
In spite of data from mortgage lenders showing declines in house prices, the average price of a home in the UK remains high.
As per the UK House Price Index, the average property price based on completed transactions in the UK in August 2023 was £291,044, which was little changed from 12 months ago.
Lloyds, which also owns Halifax and Bank of Scotland, issued its house prices prediction besides its trading statement disclosing it had made huge profits as it continues to benefit from higher interest rates.
The banking group disclosed a pre-tax profit of £1.9 billion for the three months to September, up from £576 million in the same period last year.
Most banks have reported higher profits because of increasing interest rates, as customers pay more to borrow cash for mortgages, loans and credit cards.
There have been concerns banks are increasing borrowing rates much faster than they are savings rates, especially for easy access accounts. The average easy access savings rate is currently 3.21%.
But banks including Lloyds have defended themselves against the criticism.
Charlie Nunn, group chief executive at Lloyds, said the bank remained “focused on supporting our customers and helping them navigate the uncertain economic environment”.