UK property prices are set to fall by 12% as first home buyers see their purchasing power eroded, economists have warned.
The warning comes as the average interest rate on a two-year fixed-rate mortgage topped 6 per cent for the first time since 2008, according to financial data provider Moneyfacts.
The market has already started to cool, even before the recent rise in mortgage rates. The median home price fell by one percent between August and September, according to the Halifax mortgage lender.
Meanwhile, renters face an increase of more than 20 percent in rental costs over the next five years, according to a forecast by estate agent Knight Frank.
First-time buyers don’t just face rising rents, they also have to deal with the full force of rising costs across the economy, from energy bills to groceries.
“This destruction of purchasing power prices are driving first-time buyers out of the market. Many simply cannot now afford to buy at current prices,” said Andrew Wishart, property economist at consultancy Capital Economics. The independent.
And while the average house price is expected to fall by around 12% by the end of 2024 according to Capital Economics, inflation is also expected to rise further, eroding home deposit savings. The Bank of England has predicted that inflation could reach 13 percent in January next year.
A weakening of the position for renters and first-time buyers has an impact on the outlook for the housing market as a whole, Mr Wishart said: “Once that happens, it spreads further towards the middle and upper end of the market.”
“It’s going to be very difficult to get on the housing ladder next year. You also don’t want to buy into a bear market with a high interest rate,” he added.
Lenders are being told by the City’s watchdog, the Financial Conduct Authority (FCA), to make sure borrowers can afford their mortgage repayments, even if interest rates rise. Given market expectations for rate hikes, the average loan-to-income ratio – a measure of repayment costs – could fall from 4 to 3.7 by next summer.
In practical terms, this would reduce the maximum mortgage a typical first-time buyer household on an annual income of £55,000 could secure from £275,000 to £203,000, according to Mr Wishart.
The UK is not the only market where rising interest rates are affecting prospective home owners and renters. Central banks are trying to curb inflation by raising interest rates in all developed economies, including the US Federal Reserve.
But the Truss government’s handling of the mini-budget and the resulting market volatility accelerated the rise in mortgage rates, economists and investors said.
The housing market will not be able to “sustain interest rates as high as 5 or 6 percent,” Mark Dowding, chief investment officer at Bluebay Asset Management, said in a note.
And the “mini” budget “is likely to have done more to damage confidence and push the economy into recession than it has done anything to boost aggregate demand,” he added.
Rising debt costs tend to make businesses and consumers more pessimistic, but this has been exacerbated by recent policy interventions, economists said.
“The huge volatility caused by the mini-budget has hit people’s confidence,” said Suren Thiru, chief financial officer at the Institute for Chartered Accountants in England and Wales (ICAEW).
“It’s not just the impact of the mini-budget itself, though. It’s the new perspective of Austerity 2.0,” he added, noting the Prime Minister’s and Chancellor’s suggestions that public spending cuts would be needed to fund the tax cuts.
Government borrowing costs rose sharply after Chancellor Kwasi Kwarteng’s mini-budget and the Bank of England’s activation of bond market intervention.
Market expectations for inflation and interest rates rose as they analyzed the impact of the expansionary tax cuts Mr Kwarteng outlined last month. Investors were also troubled by the lack of clarity about what policies will mean for the UK’s public finances in the absence of the usual assessment by the independent watchdog, the Office for Budget Responsibility (OBR).
Liz Truss and Mr Kwarteng backed plans to cut the 45 per cent tax rate on high earners and said they would work with the OBR to provide economic and fiscal forecasts alongside spending plans by next month, after rejecting OBR’s previous offer of new forecasts. just in time for the mini budget.
Ms Truss said the Government was helping first-time buyers by raising the stamp duty threshold, a tax on property transactions, from £300,000 to £425,000.
Economists do not expect this to offset the larger impact of higher borrowing costs on the housing market.
On Thursday Mr Kwarteng met with mortgage lenders and bank chiefs urged him to consider expanding the government’s mortgage guarantee scheme to manage the risks of lending to new borrowers.