Analysts are warning that UK house prices could fall by as much as 20% over the next two to three years, as turmoil in financial markets and rising mortgage rates create a 'carnage' in the housing sector. The warning follows the chaos unleashed by Chancellor Kwasi Kwarteng's mini-budget, which has led to a sharp increase in borrowing costs.
Ray Boulger, senior mortgage technical manager at John Charcol, predicts a fall of around 10% next year, while Credit Suisse analysts suggest a drop of 10% to 15%. Graham Cox, director of Self Employed Mortgage Hub, warns of a potential 20%-plus decline, stating, 'If you use simple maths and common sense, how can house prices not fall?' He adds that the decade-long property bubble is about to burst.
Despite the gloomy forecasts, some experts believe a shortage of housing supply could prevent a full-blown crash. Ian Hewett, founder of the Bearded Broker in Kent, notes that the lack of stock is 'startling' and may keep prices from plummeting even if demand drops sharply. However, homeowners are bracing for a significant increase in interest rates from the Bank of England, which will make mortgages much more expensive for the 2.2 million people on variable rates.
Mortgage rates have already surged, with the average two-year fixed rate for a 75% loan-to-value mortgage nearly tripling to 3.64% in August from 1.34% at the start of the year. Pantheon Macroeconomics predicts it could reach at least 6% by year-end. Nationwide has increased some fixed rates by up to 1.2 percentage points, with its most competitive two-year fixed rates now above 5.5%, compared to below 1% just 13 months ago.
The proportion of disposable income absorbed by mortgage payments could soar to 32% early next year, up from 22% at the start of 2022, according to Pantheon Macroeconomics. For London first-time buyers, mortgage payments already swallow more than 50% of take-home pay. The turmoil in the mortgage market, with rates changing rapidly, is causing headaches for buyers and brokers alike.
