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%.
1Mortgage rates shot up to their highest levels in 14 years after the pound tumbled last night.
It comes after house prices fell by 0.1% in September, according to figures from Halifax’s September House Price Index.
New buyer inquiries fell for the fifth month in a row in September, the Royal Institution of Chartered Surveyors (RICs) has found.
A typical UK property now costs £293,835, according to Halifax’s index.
However, the latest house index figures come before the current market turmoil which followed the Chancellor’s mini-Budget in late September.
The value of the pound against the dollar plummeted and led the Bank of England to warn that interest rates could hit 6% next year.
In turn, over 1,000 cheap fixed mortgage deals were pulled from the open market – pushing up the cost of borrowing, which in turn could lead to plummeting house prices.
And according to Zoopla, mortgage rates were set to rise to 4-5% over before the mini-Budget.
But, the fall-out from the mini-Budget added an extra 1% to mortgage rates, which are now settling around the 6% mark.
The annual rate of house price growth slowed to 9.9% in September from 11.4% in August – returning to single digits for the first time since January.
Nationwide’s September House Price Index also showed a slowing in annual house price growth – dropping from 10% in August to 9.5% in September.
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.”
But Zoopla is more sceptical about a major fall in house prices. The real estate firm said that house prices are unlikely to fall dramatically unless there’s a major battle to haggle asking prices down.
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.