Why UK house prices could fall by 20% after recent interest rate hike

UK real estate agents are generally optimistic but will be watching with concern next Thursday afternoon when Bank of England is expected to broadcast the latest crisis in a rapidly deteriorating property market.

Crunch time has come for a group that has for years seemed to defy gravity. Threadneedle Street’s monetary policy committee (MPC) is set to raise official lending rates for a 10th consecutive meeting, with mortgage approvals already 30% below their previous levels and the cost of houses down 4.3% from the highs of last August, according to the report. the Halifax bank.

Further declines are inevitable as borrowers adjust to a period of persistently high interest rates. The City is preparing for an increase of half a percentage point, to 4%, and for the rate to remain high until the Bank is satisfied that the rate is maintained by reach its 2%.

Analysts agree that 2023 will see a further drop in house prices, with one predicting a drop of more than 25% based on the price of the price

There are fundamental reasons why UK house prices are rising – tougher planning rules, a tax system that rewards home ownership, a sharp drop in the number of new homes being built. built since the 1950s and 1960s – but sometimes it breaks down. the situation.

This year will be one of those rest periods. A long rally fueled by record-low interest rates is underway.

The party always ends sooner or later, even with the low interest rate, finding a deposit for a house and paying the mortgage has become a struggle. Figures from the Halifax this week showed that a first-time buyer paid just £300,000 to get a foot on the property ladder and needed a deposit of £62,000. More than 60% of mortgages were completed in joint names last year.

But there are two other factors that have caused the rapid increase in demand: the constant increase in official interest rates since late 2021 and the impact of Liz Truss’s short term as prime minister, which has affected mortgage rates that are rising to almost enough 6%


Andrew Wishart, a businessman in the capital Economy, said average mortgage rates rose from 1.4% at the end of 2021 to a high of 5.7% in November of last year. Although the effects of Kwasi Kwarteng’s budget have weakened slightly, the mortgage is likely to be above 4.5% by the end of the year.

“Although the current state of housing prices was cheap when the interest rate was 2%, this is not the case with the mortgage at 5%, 4% or 3%,” said a Wishart. “Higher mortgage rates mean consumers will be less able and willing to borrow, reducing their budgets and putting downward pressure on house prices. Returning capacity to a sustainable level by the end of the year means a drop in price-to-earnings from nearly eight times current earnings to below six, equivalent to a drop in prices of about 20%.”

George Buckley, a British businessman at Nomura, said that housing prices should fall because the rise in interest rates has made it more expensive to service loans. The extent of the fall will depend on how quickly this adjustment occurred. Nomura said that in order for the mortgage repayments-to-income ratio to return to its long-term average by the end of this year, a rate would be needed. u at 20% of prices. If the adjustment was made slowly between now and the end of 2027, the decline would be less than 10%. Nomura’s central forecast is for prices to fall 15% by mid-2024.

Kallum Pickering, chief UK economist at Berenberg, said the rate of correction in house prices was important because the wider UK economy was sensitive to big changes – whether up or down. below. According to the latest bulletin from the Royal Institution of Chartered Surveyors (RICS), he said, the recent decline is likely to be similar to the early 1990s, when interest rates peaked at 15%, and the global financial crisis, when Britain’s financial system rose to the brink of collapse.

“Apart from the latest series of impressively positive data for the economy as a whole, the December RICS housing market survey makes for terrific reading,” said Pickering.

The main house price balance – the gap between RICS members who say prices are going up against those who say they are falling – stood at – 42.0% in December, compared to -25.7% in November, the lowest monthly balance since October 2010 and the third. largest annual decline since 1978.

“The biggest annual recession happened in the late 1980s, before the early 1990s housing market crash and recession, but the second recession happened during the global financial crisis in 2008. Although the collapse of the housing market was expected by investors (including us), the monthly decline in the study December was better than our expectations and consensus,” Pickering said.

In the early 1990s, the doubling of unemployment prolonged and deepened housing prices, as people who lost their jobs had to sell their homes in a falling market. Although the current low level of unemployment makes records that cannot be recovered, Wishart said that there will still be a significant drop in prices.

“Overall, even in the absence of aggressive sales we think the high mortgage rate will lead to another major downturn in the housing market this year.” House prices fall by 12% we expect to fall just shy of the nearly 20% declines seen in 2007-09 and 1989-92, and only pick up again house prices at their March 2021 level. But note that in real terms there is about a 27% drop, on par with those areas.

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