UK property prices are expected to fall by as much as 12 percent as those looking to get their first home will see their purchasing power destroyed, economists have warned.
The warning comes as the average interest rate for a two-year fixed-rate mortgage exceeded 6 percent for the first time since 2008, according to financial data provider Moneyfacts.
The market has already started to cool down, even before accounting for a recent rise in mortgage rates. Median house prices fell 0.1 percent between August and September, according to the Halifax mortgage lender.
Meanwhile, renters face a more than 20 percent increase in rental costs over the next five years, according to a forecast from real estate broker Knight Frank.
First-time homebuyers not only face rising rents, they must also contend with the full force of rising costs throughout the economy, from energy bills to food.
“That price destruction of purchasing power drives first-time buyers out of the market. Many just now can’t afford to buy at current prices,” said Andrew Wishart, real estate economist at consultancy Capital Economics. the independent.
And while the median home price is projected to fall about 12 percent by the end of 2024 according to Capital Economics, inflation is also expected to rise further, eroding savings for home deposits. The Bank of England has forecast that inflation could hit 13 percent in January next year.
The weakening position of renters and first-time buyers has an impact on the outlook for the housing market as a whole, Wishart said: “Once that happens, it spreads more towards the middle and upper end of the market. “.
“It is going to be very difficult to climb the housing ladder in the coming year. You also don’t want to buy into a falling market at a high interest rate,” she added.
Lenders are required by the City’s watchdog, the Financial Conduct Authority (FCA), to ensure that borrowers can afford their mortgage payments, even if rates rise. Given market expectations of rate hikes, the median loan-to-income ratio – a yardstick for measuring repayment costs – could fall from 4 to 3.7 by next summer.
In practical terms, that would reduce the maximum mortgage a typical first-time homebuyer with an annual income of £55,000 could get from £275,000 to £203,000, according to Wishart.
The UK is not the only market where rising interest rates are hitting would-be homeowners and renters. Central banks are trying to curb inflation by raising interest rates in developed economies, including the US Federal Reserve.
However, the Truss administration’s handling of the mini-budget and resulting market volatility hastened the rise in mortgage interest rates, economists and investors said.
The housing market won’t be able to “bear rates as high as 5 or 6 percent,” Mark Dowding, chief investment officer at Bluebay Asset Management, said in a note.
And the ‘mini’ budget “has probably done more to damage confidence and push the economy into recession than anything it has done to boost aggregate demand,” he added.
Rising debt costs tend to make businesses and consumers more pessimistic, but this has been made worse by recent political interventions, the economists said.
“The huge volatility caused by the mini-budget has affected people’s confidence,” said Suren Thiru, director of economics at the Institute of Chartered Accountants in England and Wales (ICAEW).
“However, it is not just the impact of the mini-budget itself. It is the new perspective of Austerity 2.0,” he added, pointing to suggestions from the prime minister and chancellor that public spending cuts will be needed to finance tax cuts.
The cost of government borrowing rose sharply in the wake of Chancellor Kwasi Kwarteng’s mini-budget and the triggering intervention in the bond market by the Bank of England.
Market expectations for inflation and interest rates rose as they analyzed the effects of the sweeping tax cuts introduced by Kwarteng last month. Investors were also unsettled by a lack of clarity about what the policies would mean for UK public finances in the absence of the usual assessment by the independent watchdog, the Office for Budget Responsibility (OBR).
Liz Truss and Mr. Kwarteng rowed back on plans to cut the 45 percent tax rate for high-earners and said they would work with OBR to provide economic and fiscal forecasts along with spending plans for the next month, after rejecting OBR’s earlier offer. OBR of new forecasts in time for the mini-budget.
Ms Truss has said the government is helping first-time buyers by raising the threshold for stamp duty, a property transaction tax, from £300,000 to £425,000.
Economists do not expect this to offset the larger impact of higher borrowing costs on the housing market.
On Thursday, Mr Kwarteng met with mortgage providers and was urged by bank chiefs to consider an extension of the government’s mortgage guarantee scheme to manage the risks of lending to new borrowers.