Zoopla warns of ‘double-digit’ house prices falling if mortgage rates stay at 6%

New findings from online property portal Zoopla reveal that turmoil in the UK mortgage market is putting pressure on buyer demand.

Zupla said that in the wake of the government’s “mini-budget” last month, demand among potential property buyers fell 33 percent.

The recent sudden increase in mortgage rates across the UK represents the biggest shock to interest rates since the late 1980s.

The explosive rise in mortgage rates, which have been over 6 per cent for both two-year and five-year fixes, has made the prospect of moving up or up the property ladder a distant dream for growing numbers of people across the UK.

Zoopla said that if mortgage rates ease to around 4 per cent next year, the UK could be left facing a “modest” 5 per cent drop in average property prices.

Should property prices fall an average of 5 per cent next year, that would mean the average UK home would lose out on eight months of capital gains, with London expecting the biggest loss in value and Wales the least.

But Zoopla added that if mortgage rates remain around the 6 per cent mark, the UK will see a ‘double-digit’ drop in house prices in 2023.

With borrowing costs on the rise, the share of buyers now looking to buy a home with cash or just a small mortgage is 48 percent, according to Zoopla.

The research added that lenders are now testing affordability with mortgage rates as high as 8 percent, adding pressure on purchasing power.

And while tensions abound in the broader economy, Zoopla said she doesn’t think any “signs of any impact on prices” will emerge in the fourth quarter of this year.

“Usually, it takes several months for prices to adjust in the face of weak demand,” she added.

UK house prices are up 8.1 percent in the year so far, amid rising demand and a strong number of agreed sales in the past six months, according to Zoopla. In the year through September, real estate prices rose 8.2 percent.

The annual growth rate is starting to slow across the board, Zoopla added, and this will accelerate further in the first few months of next year.

Looking ahead, Zoopla said “sustainable” mortgage rates of 6 percent would drop property prices “in the double digits,” eroding paper gains on the pandemic, but “few instances of negative equity.”

“The most likely outcome is a decline in mortgage rates of about 4 percent and a modest drop in home prices of up to 5 percent through 2023 with sales of up to one million,” she added.

“If mortgage rates decline rapidly in the next quarter, the outlook for next year will be very different compared to the possibility that mortgage rates will remain at or above 6 percent for the next 12 months,” Zoopla said.

The property portal added that a strong labor market and scarce supply would support prices, but markets in the south of England would feel the biggest impact of any drop in prices.

And according to Zoopla, the number of sales that are declining is also on the rise, mainly driven by the lack of affordable mortgages. However, the research found that “pent-up demand” remains strong, with 1.3 million sales scheduled to be completed by the end of the year.

About 7 percent of homes for sale this month saw their asking price drop by about 5 percent, which is an increase from recent months but still below 2018 levels.

Buyer interest in the South East fell by 40 per cent in the last month, and by 38 per cent in the West Midlands. The decline in buyer interest is also evident in more affordable regions such as the North East and Scotland, Zoopla said, but to a lesser extent.

The outlook for next year hinges on the trajectory of mortgage rates, which affects the purchasing power of households already facing higher costs of living, said Richard Donnell, CEO of Zoopla.

Mortgage rates have always been heading towards 4-5 percent and the effect of the micro budget has boosted them even higher.

We expect borrowing costs to come down in 2023 mitigating some of the damage to purchasing power, but we also expect a degree of rate adjustment in the face of price-sensitive demand.

“Home prices have skyrocketed due to the pandemic and homeowners who want to sell in 2023 will need to be realistic about the price and may have to give up some of the pandemic price gains to make the sale.”

Caroline Pattinson, managing director at Pattinson Estate Agents, said: ‘It has certainly been an interesting time in the real estate market in the past few months.

“After the mini budget and interest rates went up, we saw some buyers change their minds about buying.

However, we don’t see every chain collapse and the sales pipeline reduced to nothing. Lots of people with sales in progress committed to moving months ago, and if they had applied for a mortgage they would have bought at lower interest rates.