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Can the housing market handle higher interest rates?

The rise in mortgage rates implied by our new higher policy rate forecasts would reduce affordability by 12% over the next year which, in isolation, is not especially alarming when considering that the home sales-to-new listing ratio is still pointing to house price inflation of 20% and wage growth looks set to accelerate to 5% y/y in the coming quarters. But to the extent that house prices are already overvalued, the clear risk is that even a modest hit to affordability could act as a trigger for house price declines.

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