House prices to fall by up to 10% ‘soon’ as interest rates rise, economists warn

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House prices in Britain could fall by up to 10 percent ‘soon’ as rising interest rates cause property markets across the globe to crash, economists have warned.

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A rise in borrowing costs, and the anticipation of further hikes in the coming months, are already fueling ‘sharp downturns’ in housing markets across advanced economies including the UK, according to Neil Shearing, chief economist at Capital Economics.

UK house prices have seen double-digit growth over the last year, with the latest index by Halifax showing annual growth of 13 percent in June – the highest annual increase since 2004.

UK house prices are forecast to fall between 5% and 10% as the Bank of England hikes rates

UK house prices are forecast to fall between 5% and 10% as the Bank of England hikes rates

UK house prices are forecast to fall between 5% and 10% as the Bank of England hikes rates

This recent surge in prices ‘looks alarmingly similar’ to what happened in the run-up to the global financial crisis, Shearing said, although he noted that a crisis of the scale of 2008 was ‘unlikely’.

The recent boom in prices has been fueled by record low interest rates, as opposed to loose lending standards in the run-up to the financial crisis of 2008, according to Shearing.

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But as central banks including the Bank of England are now steadily hiking borrowing costs to combat inflation, they are also removing the ‘key prop’ to housing markets.

Higher mortgage rates are squeezing first-time buyers and those looking to remortgage, who have already seen rates on home loans jump from 1.6 percent to 2 percent on average.

Average mortgage rates have jumped by 0.5 percentage points in the last month alone, according to data from Moneyfacts.

Five-year fixed-rate deals are now at an average of 3.89 percent, a 0.52 percentage point increase compared to June and the highest interest since November 2014.

The pressure on home buyers will get worse as the Bank of England is set to continue increasing the base rate, which currently stands at 1.25 percent after five hikes since December last year.

Signs that an imminent correction in prices are all already here, according to the economist, who predicts this time it will happen faster than during the 2008 crash.

Measures of housing market activity, such as mortgage approvals and sales, have all started to drop, the economist said, describing this as the ‘third stage’ of a typical housing downturn, coming after a slowdown in market sentiment and buyer inquiries.

The fourth stage is when prices fall – and Shearing forecasts a drop of between 5 to 10 percent in the UK, with much bigger falls of 20 percent in New Zealand and Canada, where ‘markets are particularly over-valued’.

House prices in Australia are expected to fall by 15 percent, and by 10 to 15 percent in Sweden, while in the US they are likely to drop by 5 percent.

Capital Economics said that the recent surge in prices 'looks alarmingly similar' to what happened in the run-up to the global financial crisis.

Capital Economics said that the recent surge in prices 'looks alarmingly similar' to what happened in the run-up to the global financial crisis.

Capital Economics said that the recent surge in prices ‘looks alarmingly similar’ to what happened in the run-up to the global financial crisis.

Signs that the UK housing market is slowing down have intensified in recent months, despite prices continuing to grow in the double digits.

The Royal Institution of Chartered Surveyors (RICS) recently reported that new inquiries from prospective buyers fell in May for the first time in eight months.

The number of UK home sales increased by 1.3 percent between April and May, according to the most recent property transaction data from HMRC, but they are 5.1 percent lower than a year ago.

Meanwhile, the latest figures from the Bank of England show that the number of mortgage approvals was just 0.1 percent higher in May, and down by almost a quarter compared to a year before.

‘The US, UK, Canada, Australia, New Zealand, and Sweden are now all in the third stage of the downturn,’ Shearing said.

‘What’s more, compared to the mid-2000s, this one is happening more quickly, with most indicators showing sharper initial falls.’

A cooling of the housing market is unlikely to deter the Bank of England from continuing to hike interest rates, he added.

In the UK, mortgage payments as a share of median disposable income are still well below the levels seen in both the mid-2000s and the early-90s housing bubble, economists said.

In the UK, mortgage payments as a share of median disposable income are still well below the levels seen in both the mid-2000s and the early-90s housing bubble, economists said.

In the UK, mortgage payments as a share of median disposable income are still well below the levels seen in both the mid-2000s and the early-90s housing bubble, economists said.

However, he believes both home buyers and banks are better equipped to weather a downturn than they were in 2008.

‘In the UK, low borrowing costs mean that, despite the rise in prices, mortgage payments as a share of median disposable income are still well below the levels seen in both the mid-2000s and the early-90s housing bubble,’ Shearing said .

However, he added: ‘A crisis on the scale of 2008 is unlikely. But a housing downturn will nevertheless cause pain for developers and the construction sector, and it is possible that this could spill over into problems in the non-bank financial sector.

‘Downturns have a way of uncovering vulnerabilities in areas that are difficult to anticipate.’

He expects the shift from ‘boom to bust’ in housing will shave between 0.5 percent and 2 percent off gross domestic product in the UK, as well as the US, Canada, Australia and New Zealand over the next couple of years.

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