Rise in mortgage rates cools housing market activity

A rise in mortgage rates to their highest since May 2019 has cooled housing market activity, with mortgage applications for home purchase dropping to a 31-month low in the last week of February.  Admittedly, the war in Ukraine pushed mortgage rates down last week but given the large number of borrowers who brought forward an application at the start of the year, we doubt that will trigger another surge in mortgage demand. And beyond the short term, we expect mortgage rates to rise to around 4.5% by end-2023. With no sign lenders are set to significantly loosen credit standards, that will cut purchasing power and bring house price growth down to 5% y/y by end-2022. Rental growth is now cooling as demand eases, and we expect a slowdown to around 5% y/y by end-2022. A further small fall in yields will help total apartment returns to a healthy 10.6% in 2022, before rising yields and a further slowdown in rents brings them down to around zero by 2025.