UK house prices set to fall as mortgage costs shoot up, experts warn

• What’s happening to mortgages?
• How does this affect house prices?
• Most read in Money
• URGENT RECALL
• CLOSING TIME
• CLOSING TIME
• TAKE NOTE
• BILL HELP
• A-LOAN

SURGING mortgage rates could push down house prices in the year ahead, according to surveyors.

The experts have said “storm clouds are visible” in the housing market, as the average two-year mortgage rate has hit 6.46%.

Mortgage rates shot up to their highest levels in 14 years after the pound tumbled last night.[/caption]

New buyer inquiries fell for the fifth month in a row in September, the Royal Institution of Chartered Surveyors (RICs) has found.

But a limited supply of properties for sale is still supporting modest price rises, but this looks set to end as the pace of growth slows markedly.

The outlook for interest rates and uncertainty over the wider economy are taking their toll, with the impact of rising mortgage rates expected to outweigh the boost that buyers could get from stamp duty cuts in the recent mini-Budget.

The average two-year fixed mortgage rate on the market on Wednesday was 6.46%, according to Moneyfacts.co.uk.

And the average five-year fixed deal was 6.32%. Both of these average rates are the highest since 2008.

But the number of homeowners wishing to sell has dropped and housing stock remains at historic lows.

Sales volumes have been falling for five months in a row and are at their worst levels since May 2020, in the early period of the coronavirus pandemic.

Around 18% of property professionals expect house prices to fall rather than increase over the next 12 months.

They cited expected further substantial rises in mortgage rates as a factor, RICs said.

RICs chief economist Simon Rubinsohn said: “The turmoil in mortgage markets in recent weeks has compounded the increasing level of economic uncertainty resulting from higher energy bills and the wider cost-of-living crisis, in shifting the dial in the housing market.

“Storm clouds are visible in the deterioration of near-term expectations for both pricing and sales.

“It is difficult not to envisage further pressure on the housing sector as the economy adjusts to higher interest rates and the tight labour market begins to reverse.”

“For now, mortgage arrears and possessions remain at historic lows but they are inevitably going to move upwards over the next year, as pressure on homeowners grows.”

Tom Bill, head of UK residential research at Knight Frank, said: “An era of double-digit price growth was already coming to an end but the mini-Budget looks set to accelerate that process.

“Sentiment has been damaged as lenders have struggled to fix rates, marking the end of a 13-year period of ultra-low borrowing costs.

“While we expect downwards pressure on prices, we do not expect the scale of declines seen during the global financial crisis thanks to record-low unemployment and well-capitalised lenders.”

What’s happening to mortgages?

Mortgage rates were already rising partly due to soaring inflation and frequent rises to the Bank of England’s base rate.

The BoE raised interest rates by half a percentage point to 2.25% for the seventh time in a row last Thursday.

And any increase to the base rate of interest makes borrowing more expensive.

A swathe of tax cuts promised in the Mini-Budget spooked the market, with lenders withdrawing mortgage products from sale.

At the same time, a plummeting pound fuelled concerns of an emergency interest rate rise.

Experts warned that if rates did jump, the average mortgage bill would increase by £5,000 a year.

How does this affect house prices?

As homeowners will have to fork out thousands of pounds extra a year to pay their mortgage if interest rates continue to rise — many could be put off moving.

A fall in demand tends to lead to a natural fall in house prices.

So it’s bad news for sellers as they could be forced into lowering their asking prices if demand falls.

And Credit Suisse warned last month that house prices could “easily collapse by ten to 15%” if borrowing costs continue to rise.

However, some mortgage experts including Nick Morrey of Coreco argue that because the UK has a low supply of housing, predictions that house prices may collapse by 15% should be taken with a pinch of salt.