Mortgage rates will hit an eight-year high by 2023, putting homes at risk of being overvalued, it has been said.
In its market forecast, Capital Economics said this would be due to constraints on mortgage affordability. She estimated that in addition to a 34% rise in house prices since 2014, rising mortgage rates will cause the cost of repayments to be 46% of median income instead of 38%.
Andrew Wishart, senior property economist at Capital Economics, also said that with lender interest margins now at their lowest since before the 2008 financial crisis, any increase in the Bank of England’s base rate would be passed on to lenders. borrowers.
The firm has revised its forecast for the base rate upwards, saying it now expects it to rise to 2% by the end of next year instead of 1.25%. originally offered.
Wishart said this would be caused by continued wage and price pressures.
“We are therefore raising our forecast for the average mortgage rate on new loans from 2.5% to 3.2% by mid-2023, which would be the highest since 2014,” Wishart added.
This is in light of a poll of 40 economists conducted by Reuters between February 7 and 11, which found that two-thirds expected the base rate to rise to 0.75% in the next meeting in March.
No collapse in property prices expected
Wishart said that although house prices appear expensive by historical standards, the overvaluation would not be as extreme as it was before the financial crisis or before any substantial decline in house prices.
“As a result, our base-case scenario remains that house prices will stagnate rather than collapse in 2023,” he noted.
Overvalued properties will raise the cost of mortgage payments above their long-term average and to their highest level since the mid-2000s, after which house prices fell 20%, Wishart added.
However, he said the cost of reimbursements would remain below the peak in 2007, when it reached around 60% of median income. This is the level that the cost of redemptions tends to reach before major price corrections.
The strength of the labor market will also help prevent any collapse in house prices.
Wishart said the company’s forecast was based on a cooling in house price growth that remains to be seen. However, he said continued double-digit house price growth would further deteriorate mortgage affordability, leading to a more severe price correction.
He added: “Overall, the rise in interest rates makes the question of whether a house price correction is on the horizon more finely balanced.
“If, as we expect, the higher cost of a mortgage dampens demand and slows house price growth in 2023, affordability would not become as tight as before past corrections. This should prevent the housing market from collapsing under its own weight.
Shekina is the business writer for Mortgage Solutions. She has over four years of experience in the B2B publishing market, with previous industries including accounting, pets, funerals, hospitality, retail and jewelry. She currently reports mortgage market news and liaises with financial clients to produce sponsored content. Follow her on Twitter at @ShekinaMS