Mortgage rates are set to rise to over 5% within the next couple of weeks which will help cool, but not crash, housing market activity. Pent-up demand from the last couple of years as buyers have struggled to find a home, and the continued need for more space to work from home, will prevent a sharp fall in home sales over the next year. Indeed, the rise in mortgage rates seen since the start of the year has only led to a modest drop in both the share of households planning to buy and applications for home purchase. That said, higher mortgage rates and tight credit conditions will reduce buyers’ purchasing power, which will lead to a rapid slowdown in house price growth from around 19% y/y at the start of the year to around 5% y/y by the end. Rental demand is starting to ease as the wave of pent-up demand from COVID-19 lockdowns works itself through. Alongside a surge in apartment construction that will slow rental growth, which helps explain our view that total returns are set to fall from 19% in 2021 to around 10% this year.
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