Even assuming the average mortgage rate falls to 4.6% this year, a typical first-time buyer who wants to keep his payments at a typical level of 25% of his after-tax income would need to cut his home buying budget from £263,000 to the end of 2021 to £220,000 by the end of 2023, Mr Wishart said. This equates to a £43,000 drop, or a 16 per cent drop in house prices.
But this is only a threat on the demand side, which cuts the budgets of potential buyers. The real question for the home price outlook is when sellers should accept lower offers.
This is where higher debt is key – the more borrowing homeowners have taken on, the bigger the blow from higher rates.
Prices in Britain are not fall just as fast as in other countries such as Canada, New Zealand and Sweden, despite the United Kingdom recording some of the largest increases in rates. But this is probably because only a small proportion of mortgages here have variable rates – just 16 percent, compared to, say, 60 percent in Australia, according to Oxford Economics.
The impact of higher rates will be delayed in the UK and will be increasingly felt as homeowners approach the end of their fixed rate contracts and have to take out new mortgages at higher rates.
This adjustment will happen relatively quickly, because while most deals are fixed rates, these periods are much shorter – usually two or five years – than in countries like America, where 30-year fixes are standard. “The impact will become visible in the coming months,” Slater said.
As loan fixation periods come to an end, household interest payments are on track to increase by an average of 2.2 percentage points in 2023, according to Capital Economics. On a £200,000 loan, that equates to a £367 increase in monthly interest payments.
Why the labor market cannot save house prices
One of the other main arguments that some analysts put forward against imminent major house price falls is that unemployment is extremely low. Homeowners have been tested for higher rates, so in theory they should be able to afford higher payments, provided they don’t lose their jobs.
But higher mortgage rates are hitting homeowners just as they grapple with a record jump in energy prices, the highest inflation in 40 years, and the biggest drop in real earnings since records began. And unemployment is expected to rise.
Capital Economics expects a recession this year with a peak-to-trough contraction of 2% of GDP and an increase in unemployment from a low of 3.5% to 5.5% over the next 12 months.