The rise in mortgage rates from record lows to about 6 per cent has reduced the size of loans that buyers can afford to take out. This has already prevented many people from buying, leading to a decline in transactions that we expect to continue until mortgage rates and house prices are low enough to make buying a home affordable again. Longer mortgage terms and bigger deposits have helped to bridge the gap between what buyers can pay and the level of house prices, but ultimately we think a further drop in house prices is necessary.
The low number of homes on the market has limited house price falls, and we doubt we will see widespread homeowner arrears and repossessions because unemployment is low and borrowers have been stress-tested at interest rates above what they now face. Even so, the number of homes on the market is approaching more normal levels, in part because limited buyer interest means it is taking longer to sell.
We also expect the particularly severe increase in mortgage payments faced by landlords to force them to sell a substantial number of rental properties. London and the southeast are where the cost of buying with a mortgage is most expensive and where there is the highest concentration of privately rented homes, so the largest drop in house prices is likely to be there.
Medium-term house price predictions depend on three key factors: mortgage rates, pay and sentiment — all of which are uncertain, explaining why the range of predictions is vast. If you assume that pay stagnates, mortgage rates stay at 6 per cent and sentiment collapses your forecast would be a 30 per cent drop in house prices. We think that sentiment will weaken as the economy falls into recession, but we forecast that average pay will continue to rise and that mortgage rates will fall next year. On that basis, a 10-15 per cent fall in prices is the most likely outcome.
Forecast House prices fall by 12 per cent between the peak in August 2022 and the end of 2024 (4 per cent has already happened).