House prices forecast to slump 10pc with mortgages hitting incomes

Property prices are way too high, but the only fix is if the UK builds more new homes to meet demand

HOUSE prices will fall by at least 10pc next year as rising interest rates and a year-long recession trigger a slump that will force families to cut spending, economists have warned.

Credit Suisse said the rising cost of mortgages will squeeze households next year, as mortgage interest payments as a share of disposable income are expected to jump from 7.3pc to 9.6pc, the highest since 2009.

Peter Foley, an economist at Credit Suisse, said: “We expect house prices to fall at least 10pc next year in the US and UK”. He added that a “global housing slump will weigh on growth in developed economies in 2023”.

Most economists expect house prices to fall in the near term. The Office for Budget Responsibility (OBR), the Government’s independent forecaster, believes prices will fall 9pc over the next two years.

JP Morgan Asset Management also expects prices to fall, although Karen Ward, chief market strategist, ruled out a “doom loop of construction activity contracting massively, people getting into negative equity and consumer behaviour really changing because of the housing market”.

Ms Ward, who is a member of Chancellor Jeremy Hunt’s economic advisory council, also believes the recession will be shallower than many forecasters expect due to Britain’s strong jobs market, healthier bank balance sheets and a willingness by households to drive down savings to fund purchases. She also warned of the risk of inflation and pay deals remaining stubbornly high as companies struggle to find workers, keeping unemployment down. She said central bankers may be forced to revisit their inflation targets.

“I think [inflation] will be a bit slower to come down and I think that will be a bit stickier,” she said.

While she refused to comment directly on public sector pay deals being negotiated by the Government, Ms Ward described the talks as “incredibly difficult for policymakers”.

She said there remained a risk that wages and prices could spiral out of control, with parallels with the 1970s. even as union membership has waned.

Ms Ward also warned of the risk of higher inflation becoming entrenched. “In my view we will eventually get to the point where we’re discussing whether actually inflation settling a bit higher is no bad thing.”

Ms Ward said a 3pc target could be the “new normal”, though central bankers would not start those discussions until inflation fell back below the traditional inflation target of 2pc.

Credit Suisse expects borrowers in the UK to be hit harder by rising interest rates than the US because the “overwhelming majority of US mortgages” are fixed for 30 years. Most UK borrowers fix their interest rates for between two and five years.

In the bank’s annual outlook, Mr Foley said: “The UK is more interest rate sensitive than the US, and households, already squeezed by energy costs, face a larger economic downturn.”

However, Credit Suisse also believes the UK is already in recession.

It expects the economy to contract by 1.3pc in 2023 and only grow by 0.5pc in 2024.

Around 2m British borrowers have to remortgage between now and the end of 2023, representing a quarter of all outstanding mortgages. Credit Suisse said this will affect spending through a “negative wealth effect” as people generally feel poorer.

Sonali Punhani, a UK economist, said: “Our view is that the Bank of England is underestimating the persistence and strength of domestic inflation and tightness of the labour market.”

While she said inflation had probably peaked at 11.1pc in October, Credit Suisse believes price rises will remain above the Bank’s 2pc target in 2023.

Ms Punhani added: “There are risks that the Bank remains dovish and hikes rates by less than we expect, which could risk inflation being higher for longer, further sterling weakness, and eventually a more prolonged hiking cycle and higher terminal rates.”

‘The UK is more interest rate sensitive than the US. Households face a larger economic downturn’

‘The British have long thought of their home not just as a castle but also a pension pot’

The UK property market was able to shake off pestilence, war in Europe and the cost of living crisis. But Kwasi Kwarteng’s minibudget – the unofficial fourth horseman of the apocalypse that set a rocket off under mortgage rates – appears to have been too much for even the most bombproof cockroach of global assets.

Home sellers cut their asking prices at the sharpest pace in four years in early December, according to the latest data from Rightmove out yesterday, meaning the average asking price has fallen by 2.1pc over the last month following a 1.1pc decline in November.

A separate survey from Halifax showed that prices fell by 2.3pc last month, the biggest monthly drop since the financial crisis in 2008. Persimmon, one of the UK’S biggest housebuilders, recently announced that weekly sales per site were falling and buyer cancellations were rising. This is part of a global phenomenon – house prices were falling in half of the 18 rich countries monitored by Oxford Economics in October – but the UK market is looking particularly precarious. The latest numbers from the RICS Residential Market Survey highlighted the speed and the timing of the downturn. The net balance of surveyors reporting that house prices were increasing in the last three months fell from +30 in September to -2 in October – the biggest drop since the survey was launched in 1978.

The Bank of England has hiked interest rates eight times in the past year, from close to zero in 2021 to 3pc in November. Mortgage rates shot up to over 6pc following Kwarteng’s fiscal statement in September. They’ve calmed down a bit, but not much.

There are those that argue a fall in house prices is badly needed. Property values have soared way too high, boosted by an era of cheap debt and the failure of governments to address this country’s chronic inability to build enough houses to meet demand.

This has resulted in many young people being priced out of even the possibility of home ownership. A house price correction, it is hoped, might help to take some of the air out of the market and start to address the imbalance. Fat chance. A housing slump will involve far more pain than gain. Falling prices will hurt the economy in ways both obvious and oblique and, as well as giving politicians a headache, may limit the Bank of England’s room for manoeuvre in its fight against inflation. The first issue is the coming hit to consumer sentiment. About half of the world’s wealth is tied up in property. The British have long thought of their home not just as a castle but also a pension pot. If it starts to shrink in value, consumers, already tightening their belts, will be even less inclined to splash out on eating out and the like.

Central banks are, of course, attempting to cool the economy in precisely this manner by rising interest rates in the hope of bringing inflation back under control. But there’s a danger that they go too far and plunge their economies into recessions.

A house price crunch may also exacerbate problems in the labour market. If the housing market is in freefall, it will become even harder to persuade potential new recruits to up sticks and move to a new location. This situation will worsen if house prices fall to the point that they are worth less than the mortgages that were taken out to pay for them. Not for nothing is negative equity described as a “trap”.

And while falling property prices should in theory make home ownership more affordable, in practice it tends not to work out that way. Those on the bottom of the housing ladder or reaching up to grab the first rung are the most exposed to a fall in prices because first-time buyers are the most dependent on debt financing. This means that those who have recently bought will be the first to dip into negative equity. And those that have not yet done so will likely find mortgage rates shooting up and banks demanding larger deposits to protect themselves against the downturn.

All of this means that governments around the world will be motivated to not only prop up house prices but also put pressure to bear on central banks as they tighten monetary policy. How might this play out? The last two times house prices hit the buffers this century was in 2008 and 2020. Both times mortgage rates fell soon. That seems less likely this time round as central banks are primarily focused on getting inflation under control.

However, there have already been calls from US politicians for the Federal Reserve to cool its ardour for rate increases lest it sets off a housing slump. How long before we get similar calls in this country? The most obvious way that politicians can try to keep house prices aloft is by stymying efforts to build new homes. And guess what? It’s already happening. Just a few days ago, the Government was forced to abandon a house-building target following a sizable rebellion by its own backbenchers.

The only thing that will provide a sustainable fix for the housing market is if we start building enough new houses to meet demand. Maybe we’ll give that a try someday – after we’ve exhausted every other option. But those hoping the coming fall in house prices might make the property market a little less dysfunctional are likely to end up disappointed.