HHome loan prices will reverse as mortgage rates double by the end of the year in the biggest rise since 1990, economists have warned.
Capital Economics analysts have predicted a 5% drop in house prices in 2023 and 2024, reversing a fifth of the surge in property values since the start of the pandemic.
The fall in property prices is expected to be driven by a jump in the average mortgage rate from 1.6% at the start of this year to 3.2% at the end of the year and a peak of 3.6% at the end of the year. mid-2023.
Andrew Wishart of Capital Economics said: “This would be the biggest mortgage rate hike since 1990.”
The predictions came as Lloyds Banking Group, the UK’s biggest mortgage lender, warned that inflation could lead to increased defaults on its loans.
Capital Economics predicts house prices will continue to rise this year, up 9% at the end of 2022 from 2021.
But rising borrowing costs will reduce buyers’ ability to bid higher and higher on property, driving prices down 3% next year and another 1.8% in 2024.
House prices hit a new high in February at an average of £277,000 across the UK, according to the Office for National Statistics, up almost 11% on the year.
Mr Wishart said: “The resulting 5% peak-to-trough drop would reverse just over a fifth of the price spike since the start of the pandemic.
“Early signs that the market is turning are already showing,” he said, with visits to real estate websites down and consumer confidence down.
Lloyds said on Wednesday that while borrower arrears remained below pre-pandemic levels, they were prepared for them to rise as the cost of living crisis hits households.
Charlie Nunn, Managing Director, said: “We are proactively reaching out to customers when we think they might need help and will continue to help with financial health checks and other means of support.
“We encourage customers, when concerned, to get advice early and talk to us.”
It came as Lloyds recorded a 14% fall in pre-tax profits between January and March to £1.6bn, from £1.9bn a year earlier.
Capital Economics’ forecast is based on a prediction that the Bank of England will have to continue raising interest rates to 3% next year.
So far officials, led by Governor Andrew Bailey, have raised the base rate from 0.1pc in December to 0.75pc now.
They are expected to push rates up to 1pc at next week’s policy meeting. Despite the increases, mortgage rates of 3.6% will remain well below pre-financial crisis rates of around 6%, limiting the damage for homeowners.
Mr Wishart said: ‘We don’t expect a repeat of 2008 or 1990 when house prices fell by around 20%. First, although the house price to earnings ratio is about the same today as it was in 2007, we do not expect a return to pre-financial crisis mortgage rates of 6%, so that the cost of mortgage repayments will remain much lower.
“Second, strong wage growth means that a modest drop in prices will be enough to bring the house price-to-earnings ratio back to a more sustainable level.”