Higher mortgage rates have not only priced many buyers out of the market altogether, but also reduced the size of mortgage those still able to buy can take out. The latest surge in mortgage rates to almost 6% means that, for the same monthly payment, borrowers would now only be able to afford two thirds of what they were able to at the beginning of last year. As a result, we think that average mortgage size, and in turn house prices, have further to fall. Meanwhile, new sales instructions rose for the first time since October 2020 in May suggesting that supply is becoming less tight. In our view, the consequence of higher mortgage rates and a modest increase in supply is likely to be a further 8% fall in house prices on top of the 4% drop seen to date.
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