Jump in interest rates takes its toll

The return of inflation for the first time in the inflation-targeting era has led to the biggest jump in Bank Rate and mortgage rates since the late 1980s. The steady downward trend in mortgage rates from 6.5% in 2008 to 1.5% at the end of 2021 allowed buyers to take out larger mortgages, increasing their budgets for the same monthly cost. Higher mortgage rates will put that trend into reverse. Admittedly, now that relative calm has been restored to UK financial markets, the peak in quoted mortgage rates is likely to be behind us. But the fact remains that while the current level of house prices was sustainable when mortgage rates were 2%, that’s not the case at 5%, 4% or even 3%. Higher rates have already caused house prices to fall by 2.5% since the peak in August. Our forecast remains that prices will fall by 12%, but the main risk to our forecast is that prices fall faster and further than we expect.