Housing activity is slowing in the face of higher mortgage interest rates. Mortgage applications for home purchase dropped to a two-year low in May, existing homes sales have declined in each of the three months to April and new home sales recorded their largest month-on-month decline in almost nine years. With mortgage rates set to rise further to around 5.5% by the end of 2022 and home buying sentiment collapsing to 40-year lows, activity will see further declines this year. That will soon show up in slowing house prices, which saw a record month-on-month rise in March. From around 20% y/y, we expect growth will drop to around 9% by the end of this year. Rental demand is also set to ease as affordability worsens. Coupled with a surge in supply that means rental vacancy rates will only see a small fall from here. Total returns are set to slow from 19% in 2021 to around 7% in 2022 and 5% in 2023.
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