House prices could fall by as much as 15% if interest rates continue to rise, economists have warned.
The fall in house prices is expected to cause the number of houses sold to fall from 1.2 million to just 800,000 per year.
The news comes after the Bank of England warned it could hike interest rates to 6% next year – a warning that caused lenders to withdraw their fixed-deal mortgages yesterday.
The move is prompted by the pound’s sharp fall in value after hitting its lowest level against the dollar since 1971 on Monday.
The value of the pound plummeted after Kwasi Kwarteng dumped his mini-budget.
The Chancellor announced a raft of tax cuts that would cost the public purse £45bn.
But the falling value of the pound and rising inflation have led the Bank of England to warn of a 1.5 percent interest rate hike by November.
The move will pressure mortgage lenders to raise rates to levels not seen since the 2008 financial crisis.
Credit Suisse warns that real estate prices could “slump by 10 to 15 percent” if borrowing costs continue to rise.
Credit Suisse’s Andrew Garthwaite said: “Sterling’s 8% decline since 1 August should add a further 1.3% to short-term inflation.
“At current swap rates, the average mortgage will be 6.3%. House prices could easily fall by 10% to 15%.”
But Ray Boulger, mortgage broker at John Charcol, has predicted a 10% fall in UK house prices over the next year.
Ray said on BBC Radio 4’s Today programme: “We can expect a significant drop in house prices, maybe 10% next year.
“While right now I don’t think we will see many more forced sellers, it will certainly have an impact on people’s ability to buy.”
Either way, homeowners will have to spend thousands of extra pounds a year to pay their mortgage – and many will struggle to find new business.
“If the policy rate were to rise from 2.25% now to 6.1% in June 2023, as currently priced in, quoted mortgage rates could rise to about 6.6% from 3.6% last month, a level that was last reached in 2008,” said Andrew Wishart of Capital Economics.
Andrew said: “At current house price levels, a rise in mortgage rates to 6.6 percent would cause the cost of repaying a new mortgage to rise to its highest level since 1990.”
Karen Noye, mortgage expert at Quilter, said: “Interest rates of 6 percent could prove disastrous for the housing market as people cannot afford the mortgage payments when they have overextended themselves.
“This could result in a wave of real estate coming onto the market just as demand wanes.”
The average house price in the UK in July 2022 was £292,000 – £39,000 higher than this time last year, according to the Office for National Statistics.
The Bank of England will now stress test UK lenders to see how they will fare if house prices fall by a third in 2023.
Eight participating banks and building societies are rated, 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 doesn’t mean they expect prices to fall that far.
At the same time, the number of mortgage offers available from lenders is being sharply reduced.
Around 365 products were withdrawn from the market in the last two days by major banks such as HSBC, Santander, Skipton, Halifax and Virgin Money.
The chaos follows last week’s mini-budget in which Chancellor Kwasi Kwarteng cut taxes by £45bn, funded by government bonds.
This spooked the markets and set off a chain reaction that is now sure to send interest rates skyrocketing. The Bank of England hiked interest rates by 0.50% weekly to 2.25%.
But there is now an expectation that 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 have fixed rates, but around 1.8 million of those loans will expire within the next year, according to UK Finance.
For a homeowner with a £200,000 two-year fixed-rate mortgage, his monthly interest payment will rise from £800 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.
The nation’s financial resilience is threatened
But if interest rates rise to 6 per cent, as the Bank of England has asked high street banks to model, that will rise to £1,408 a month – an additional £7,296 a year.
Sir Charlie Bean, former Lieutenant Governor of the Bank of England, said it was time for big action to be taken quickly or Britain could turn into a “basket case” like Greece or Italy.
He said the bank may need to hike rates by as much as 1 per cent ahead of its November meeting amid the “substantial risk” of the pound falling further.
Sterling fell to an all-time low of $1.03 after the Chancellor’s massive tax cuts and traded at $1.06 yesterday. It’s down 21 percent so far this year.
Pantheon Economics’ Samuel Tombs said the rate hike was “simply unaffordable” for many. Analysts said the squeeze on household incomes from an expected rate hike is simply that the government is “trading one cost-of-living crisis for another”.
Interactive Investor’s Myron Jobson said: “Two weeks ago, rising energy bills dominated the headlines, now it’s worries about mortgage payments. The nation’s long-term financial resilience is threatened.”
LYDIA IN £12K GAMBLE: EARLY REDEMPTION
MUM Lydia Joseph was so concerned about how to afford her mortgage with interest rates rising that she paid a £12,400 early repayment fee to switch it.
Lydia, 34, downstairs with family, from Faversham, Kent, had a three-year fixed-rate mortgage at 2.08 per cent that was due to expire in April next year.
She found that it would be better to switch to a 2.7 percent deal where the same lender even pays a fee.
Lydia would have to pay £2,632 a month if interest rates hit 6 per cent. She’s paying £1,853 for her deal, £779 less.
THREAT TO GROCERY STORES: FIXED PRICE
SECRETARY Andreea Gherasium and husband Sebastian are worried about what will happen when their four-year, four-percent fixed-rate contract ends next year.
If interest rates hit six per cent, Andreea, 30, and truck driver Sebastian, 26, from Rutland, will see their £336 monthly payments skyrocket when they sign a new contract.
The couple and children Marcus, ten, and Lucas, nine, above, are struggling to make ends meet.
They even canceled swimming lessons. Andreea said: “I’m really worried that when our permanent contract ends it means we have to cut back on our grocery store.”
FEAR WE WILL NOT OWN: INTEREST ONLY
Hard-working mum Nyree Clark fears her interest-free mortgage could rise from £253 a month to £380 if interest rates hit six per cent.
The 40-year-old from Chesterfield, Derbys, works whenever she can as a health adviser for the NHS and runs a pet courier business with husband Michael, 51.
As the mortgage is interest only, they have made it their goal to pay an extra each month to ensure they end up owning the property to pass on to son Cody, 13.
But she said: “I don’t know if I’ll be able to do that if rates go up that much. People will lose their homes.”
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