House prices will fall by as much as 15pc as higher interest rates slash buyers’ spending power, economists have warned, while the number of homes sold risks collapsing from 1.2m per year to just 800,000.
This threatens to blow a new £5bn hole in the Government’s finances, as years of rapid growth in stamp duty revenues come to an end and are thrown into reverse.
Capital Economics and Credit Suisse both estimate prices could fall by between 10pc and 15pc if interest rates rise to 6pc as financial markets predict.
“Were Bank Rate to rise from 2.25pc now to 6.1pc in June 2023 as is currently priced in, quoted mortgage rates might rise from 3.6pc last month to about 6.6pc, a level last reached in 2008,” Andrew Wishart at Capital Economics said.
Mortgage debts are larger now than they were in 2008, as property prices are higher and buyers must borrow more to secure a home. As a result, higher rates will put an even larger strain on owners’ finances than during the financial crisis.
“At the current level of house prices, an increase in mortgage rates to 6.6pc would cause the cost of repayments on a new mortgage to rise to their highest level since 1990,” Mr Wishart said.
This is “potentially a handbrake on how much people can borrow and can afford to bid for properties.”
Andrew Garthwaite at Credit Suisse said the combination of recession, higher interest rates and rising inflation will all combine to deal a serious blow to the property market.
“Unemployment has to rise to circa 6pc to control wage growth and to get inflation back to target,” Mr Garthwaite said in a note to clients. “The 8pc decline in sterling since 1 August should add a further 1.3pc to near-term inflation.
“On current swap rates, the [average] mortgage will be 6.3pc. House prices could easily fall 10pc to 15pc.”
Mr Wishart expects the number of homes sold to drop by one-third to around 800,000 per year, as buyers are unable to get the loans they need, potential sellers are put off by a drop in the market, and builders rein in their plans as lower prices mean lower returns.
Stamp duty revenues have shot up on the strength of the housing market, jumping from £6.1bn in 2010 to £12.7bn in 2019 on the eve of the pandemic, and £17.5bn in the past 12 months.
The Office for Budget Responsibility expected revenues to keep rising in the years to come.
But the decision to raise the stamp duty threshold is expected to hit receipts by around £1.5bn per year, and now the anticipated slump in the housing market could wipe an extra £5.4bn off revenues as fewer people move house and so a smaller number pay the transaction tax.
Financial markets expect the Bank of England’s base rate to rise as high as 6pc next year after the Chancellor’s big-borrowing mini-budget last week.
The Bank of England has so far refused to hold an emergency meeting to raise rates to combat turmoil in financial markets in the wake of the mini-budget. Instead officials are sticking with the headline interest rate of 2.25pc which they agreed at last Thursday’s policy meeting.
But interest rates charged by banks and building societies depend on costs in financial markets, so borrowers already face higher costs regardless of the Bank of England’s plans.
Julie-Ann Haines, the chief executive of the Principality Building Society, said borrowers have already faced “very significant” increases in their costs.
“Even so far, what we’ve seen passed on in mortgage rates is resulting in about an extra £3,000 to £4,000 a year for an average £250,000 mortgage,” she told BBC Radio 4’s Today Programme.
“What the markets do in the next 10 days is really quite important in determining how big the impact is.”
It marks an abrupt turnaround for the housing market, which has seen explosive price growth in recent years.
Price rises surged into double figures in the pandemic, propelled by record low interest rates and lockdowns, which pushed families to reassess their living arrangements.
In July, annual growth hit a new record high of 15.5pc.