Stretched affordability to hit sales and prices

Despite a reduction in our mortgage rate forecast, affordability is still set to be as stretched as it was during the mid-2000s housing boom. Alongside record-low homebuyer sentiment and a slowing economy, that means we have become more downbeat on housing activity this year. We now expect a 30% peak-to-trough fall in total home sales. The weaker outlook for new sales will weigh on single-family housing starts, which we think will end 2022 almost 35% below their end-2021 level. While tight markets and a lack of forced sellers will prevent a house price crash, we forecast that the annual growth rate will bottom out at -5% in mid-2023. From there, improving affordability will support a gradual recovery in activity and help price growth rise to 3% y/y by end-2024. Higher bond yields will also push apartment yields up a little this year and next. Coupled with a sharp slowdown in rental growth, that means we expect total annual returns to fall below 9% in 2022 and reach just 1.5% in 2023.