House prices could fall 15%, economists warn – as interest rate crisis drives up mortgage costs and deals are axed
HOUSE prices could fall by as much as 15% if interest rates continue to rise, economists have warned.
The decline in property prices is expected to result in the number of homes sold each year collapsing from 1.2million to just 800,00.
The news comes after the Bank of England warned that it could raise interest rates to 6% next year - a warning which has meant that lenders pulled their fixed deal mortgages yesterday.
The move will be triggered by the sharp fall in the value of the pound after it hit its lowest level against the dollar since 1971 on Monday.
The value of the pound tumbled after Kwasi Kwarteng delivered his Mini Budget.
The Chancellor announced a vast swathe of tax cuts costing the public purse £45 billion.
READ MORE ON INFLATION
But the falling value of the pound and soaring inflation has meant that the Bank of England is already warning of a 1.5 per cent rise to interest rates by November.
The move will put pressure on mortgage lenders to raise interest rates to levels not seen since the 2008 financial crisis.
The International Monetary Fund openly criticised Britain's new economic strategy on Tuesday and said that the plan would "increase inequality."
Credit Suisse is warning that house prices could "easily collapse by ten to 15%" if borrowing costs continue to rise.
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Andrew Garthwaite at Credit Suisse said: "The 8% decline in sterling since August 1 should add a further 1.3% to near-term inflation.
"On current swap rates, the average mortgage will be 6.3%. House prices could easily fall 10% to 15%."
But Ray Boulger, mortgage broker at John Charcol, has predicted a 10% fall in UK house prices next year.
Ray said on BBC Radio 4's Today programme: "We can expect to see a significant fall in house prices, perhaps 10% next year.
"Whilst at the moment I don’t think we’re going to see many more forced sellers… it’s certainly going to have an effect on people’s ability to buy."
Either way, homeowners will have to fork out thousands of pounds extra a year to pay their mortgage — and many will struggle to find a new deal.
Fixed mortgage rates have doubled since last year and some have now reached in excess of 6%.
“Were Bank Rate to rise from 2.25% now to 6.1% in June 2023 as is currently priced in, quoted mortgage rates might rise from 3.6pc last month to about 6.6pc, a level last reached in 2008,” Andrew Wishart at Capital Economics said.
Andrew said: "At the current level of house prices, an increase in mortgage rates to 6.6pc would cause the cost of repayments on a new mortgage to rise to their highest level since 1990."
Karen Noye, a mortgage expert at Quilter, said: “Rates of six per cent could prove disastrous for the property market as people won’t be able to afford mortgage payments if they have overstretched themselves.
“This could cause a wave of properties to come to market just when demand is drying up.”
According to the Office for National Statistics, the average UK house price was £292,000 in July 2022 - £39,000 higher than this time last year.
The Bank of England will now stress test UK lenders to see how they will cope if house prices were to fall by a third in 2023.
Eight participating banks and building societies will be assessed including Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered and Virgin Money UK.
Together they account for around 75% of lending to the UK real economy.
Although, just because the BoE is testing banks, it doesn’t mean that they expect prices to fall that far.
At the same time, the number of mortgage deals available is being slashed by lenders.
According to MoneyFacts, 935 mortgage products were pulled by lenders yesterday.
The chaos follows last week’s Mini Budget, in which Chancellor Kwasi Kwarteng cut taxes by £45billion, funded by government borrowing.
That spooked the markets and led to a chain reaction which now looks certain to sharply force up interest rates. The Bank of England raised interest rates by 0.50% week to 2.25%.
But there is now an expectation governor Andrew Bailey will be forced to go much further.
Moody's has now warned that growth in the UK economy will not return until 2026.
More than three quarters of home mortgages are on fixed tariffs, but around 1.8million of those loans are due to expire within the next year, according to UK Finance.
For a homeowner with a £200,000 two-year fixed mortgage, their £800 monthly interest payment will rocket to £1,103 if interest rates rise to 3.25 per cent — as expected by the end of this year — meaning an extra £3,156 a year, according to AJ Bell.
Nation's financial resilience under threat
But if interest rates rise to six per cent, as the Bank of England has requested high street banks to model, this will jump to £1,408 a month — an extra £7,296 a year.
Sir Charlie Bean, the Bank of England’s former deputy governor, said it was time to take big action fast or the UK could turn into a “basket case” like Greece or Italy.
He said the Bank may need to raise interest rates by as much as one per cent before its November meeting amid a “material risk” of another slide lower for the Pound.
Sterling slumped to a historic $1.03 low following the Chancellor’s massive tax cuts and was trading at $1.06 yesterday. It has fallen 21 per cent so far this year.
Samuel Tombs, at Pantheon Economics, said the interest rate rise would be “simply unaffordable” for many. Analysts said the pressure on household income from an expected hike in interest rates was simply the Government “swapping one cost of living crisis for another”.
Myron Jobson, of Interactive Investor, said: “Two weeks ago rising energy bills dominated the headlines, now it’s concern over mortgage repayments. The long-term financial resilience of the nation is under threat.”
LYDIA IN £12K GAMBLE: EARLY REPAYMENT
MUM Lydia Joseph was so worried about how she would afford her mortgage with spiralling interest rates she paid a £12,400 early repayment charge to switch it.
Lydia, 34, below with family, of Faversham, Kent, had a three-year fixed mortgage at 2.08 per cent due to end in April next year.
She worked out it would be better to switch to a deal at 2.7 per cent with the same lender even paying a charge.
Lydia would have to pay £2,632 a month if rates hit 6 per cent. She pays £1,853 on her deal, £779 less.
THREAT TO FOOD SHOP: FIXED RATE
SECRETARY Andreea Gherasium and husband Sebastian worry about what will happen when their four-year fixed rate deal at four per cent ends next year.
If rates hit six per cent Andreea, 30, and lorry driver Sebastian, 26, of Rutland, will see their £336 monthly payments soar when they lock into a new deal.
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The couple and kids Marcus, ten, and Lucas, nine, above, are struggling to get by.
They have even cancelled swimming lessons. Andreea said: “I’m really concerned that when our fixed deal ends it will mean cutting back on our food shop.”
FEARS WE WON’T OWN: INTEREST ONLY
HARD-working mum Nyree Clark fears her interest-only mortgage could jump from £253 a month to £380 if rates hit six per cent.
The 40-year-old, of Chesterfield, Derbys, works all the hours she can as a health adviser for the NHS and runs a pet courier business with husband Michael, 51.
Because the mortgage is interest-only, they have aimed to pay extra each month to ensure they own the property at the end to hand on to son Cody, 13.
But she said: “I don’t know if I’ll be able to if rates increase by this much. People are going to lose their homes.”