Economists have warned that house prices in Britain could fall by up to 10 per cent “soon” as rising interest rates cause property markets around the world to collapse.
Rising borrowing costs, and more increases expected in the coming months, are fueling a “severe contraction” in housing markets across developed economies including the UK, according to Neil Shearing, chief economist at Capital Economics.
UK house prices have seen double-digit growth over the past year, with the latest Halifax index showing annual growth of 13 per cent in June – the highest annual increase since 2004.
UK house prices are expected to drop between 5% to 10% as the Bank of England raises interest rates
Shearing said the recent price hike “looks alarmingly similar” to what occurred in the run-up to the global financial crisis, though he noted that a crisis of the scale of 2008 was “unlikely”.
And it has been hit by record low interest rates, in contrast to the loose lending standards in the run-up to the 2008 financial crisis, according to Shearing.
But with central banks including the Bank of England now steadily raising borrowing costs to combat inflation, they are also removing a “mainstay” of housing markets.
Higher mortgage rates are putting pressure on first-time buyers and those looking to remortgage, who have already seen mortgage rates rise from 1.6 percent to 2 percent on average.
Average mortgage rates jumped 0.5 percentage points in the past month alone, according to Moneyfacts data.
Five-year fixed-rate deals now average 3.89 percent, up 0.52 percentage points from June and the highest interest since November 2014.
The pressure on homebuyers will only get worse as the Bank of England prepares to continue increasing the base rate, which currently stands at 1.25 percent after five hikes since December last year.
This will eventually lead to a price correction, with signs that this is already happening here, According to the economist, who predicted this time it would happen faster than during the 2008 crash.
The economist said measures of housing market activity, such as mortgage approvals and sales, have begun to decline, describing it as a “third phase” of a typical housing downturn, which follows a slowdown in market sentiment and buyer inquiries.
The fourth stage is when prices fall – Shearing predicts a 5-10 percent drop in the UK, with an even larger 20 percent drop in New Zealand and Canada, where “markets are particularly overvalued.”
House prices in Australia are expected to decline by 15 percent, by 10 to 15 percent in Sweden, while in the United States they are likely to decline by 5 percent.
Capital Economics said the recent price hike “looks alarmingly similar” to what happened in the run-up to the global financial crisis.
The Royal Institution of Chartered Surveyors (RICS) recently reported that new inquiries from prospective purchasers fell in May for the first time in eight months.
The number of UK home sales rose 1.3 per cent between April and May, according to the latest property transaction data from HMRC, but is 5.1 per cent lower than a year ago.
Meanwhile, the latest figures from the Bank of England show the number of mortgage approvals was just 0.1 percent higher in May, and almost a quarter higher than in the previous year.
“The US, UK, Canada, Australia, New Zealand and Sweden are all now in the third stage of the economic downturn,” Shearing said.
“What’s more, compared to the mid-2000s, this is happening more quickly, with most indicators showing steeper initial declines.”
He added that a slowdown in the housing market was unlikely to deter the Bank of England from continuing to raise interest rates.
Mortgage payments as a share of average disposable income remain well below levels seen in the mid-2000s and early 1990s, UK economists said.
However, he believes that both homebuyers and banks are better equipped to weather the economic downturn than they were in 2008.
Shearing said: “In the UK, lower borrowing costs mean that despite rising rates, mortgage payments as a share of average disposable income remain well below levels seen in both the mid-2000s and early 1990s. of the last century.” .
But he added, “A crisis on the scale of 2008 is unlikely. A downturn in the housing sector will nonetheless cause pain for developers and the construction sector, potentially spilling over into problems in the non-bank financial sector.
“Economy downturns have a way of revealing vulnerabilities in areas that are hard to anticipate.”
The shift from “boom to bust” in the housing sector is expected to shrink between 0.5 per cent and 2 per cent of GDP in the UK, as well as the US, Canada, Australia and New Zealand over the next two years.
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