Are Rising Mortgage Costs Bringing House Prices Down?

by | Tuesday 11th Oct 2022 | Mortgage News


“Rising mortgage costs mean significant house price drop is inevitable”, claims economic research organisation Capital Economics in their recently released report on the state of the housing market. Is a significant reduction in house prices really on the way sooner than we think? Or is this just a red herring caused by a reluctance to buy at the moment?

In their latest housing market update publication, Capital Economics have claimed that due to a significant increase in mortgage interest rates over the last few weeks, they predict that house prices will drop by around 12%. This latest report (released 10th of October) is actually a revision to one that the organisation released earlier in the year. The dramatic shift in interest rates has caused a lot of economists and economic research organisations to recalculate and readjust their predictions.

Based on average mortgage rates of 1.5% in 2021 compared to 6% in the last week alone, they have said that the monthly cost of an 80% LTV mortgage on an average priced home has risen from under 40% of a homeowner’s disposable income to over 60%! Such a large increase in monthly payments and such a reduction in disposable income after paying mortgage costs means that more and more people will be priced out of purchasing and there would be no logical reason for house prices to keep increasing.

What Will Happen To The Housing Market Over The Next 2-Years?

Capital Economics have predicted that the labour market would remain stable and generate a 5% rise in wages. This is evident in recently released figures from the office of national statistics which have said that unemployment in the UK is currently at a 47-year record low. The amount of people in the UK currently registered as unemployed adults was just 3.5%. They go on to predict that the Bank of England’s base rate will eventually reach 5% and lead to a recession which will hopefully bring inflation down. The base rate will then start to reduce in 2024, resulting in average mortgage rates of 4%.

Although all of these things will help mortgage and property affordability for buyer, Capital Economics have claimed that a house price fall of 12% at least would reduce costs enough and bring buyers back to the market levels they were at before. However, they have also said “If rates stay higher or at 6% for longer than predicted, this will pose a further risk to mortgage affordability and instead a house price fall of 25% would be needed.”

What Do The Mortgage Experts Think About Decreasing House Prices?

So, what does this mean for mortgages? Capital Economics have already touched on the subject of mortgages but here is what we predict. It is quite obvious to us that mortgage rates aren’t going to go down until the Bank of England and the Government in conjunction, get a handle on rising inflation. Until then, interest rates will continue to rise, and we agree that this will push the country into a recession to stop inflation.

The base rate will go down and rates will average out to about 4%, which may seem high to a lot of people, but really is a normal interest rate. We have been fortunate enough to have seen record low interest rates between 1 and 3% over the last few years but 4% is a perfectly normal rate. Will they drop lower than 4%? Perhaps. But we will have to wait and see. The main issues facing new buyers or home movers is high property prices and strict mortgage affordability. If house prices and interest rates keep increasing, it will cut out a huge section of the market and house sales will drop dramatically, which can’t happen. So, house prices will have to go down.

As mortgage brokers, we are constantly watching the market and the value of properties so that we can provide our clients with the most up to date information possible. If you or anyone you know is considering buying a new property or even selling a property and moving on, please give our team a call to discuss your options. The last thing you want to do in this economy is to blindly try and navigate the property market without the support of a professional property expert. Call us today to see how we can help.

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