In its market prediction, Capital Economics said this would be because of constraints on mortgage affordability. It assessed that along with a 34 per cent rise in house prices since 2014, higher mortgage rates will cause the cost of repayments to account for 46 per cent of median income rather than 38 per cent.
Andrew Wishart, senior property economist at Capital Economics, also said as lender interest margins were now at their narrowest since before the 2008 financial crisis, any increases to the Bank of England’s base rate would be passed through to borrowers.
The firm revised up its prediction for the base rate, saying it now expected this to increase to two per cent by the end of next year rather than the originally proposed 1.25 per cent.
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 lending from 2.5 per cent to 3.2 per cent 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 7 and 11 February, which found two thirds expected the base rate to rise to 0.75 per cent at the next meeting in March.
No house price collapse expected
Wishart said although house prices would look expensive by historical standards, the overvaluation would not be as extreme as it was before the financial crisis or prior to any previous substantial fall in house prices.
“As a result, our base case remains that house prices will stagnate rather than collapse in 2023,” he noted.
The overvaluation of properties will raise the cost of mortgage payments above their long-run average, and to their highest level since the mid-2000s after which house prices fell by 20 per cent, Wishart added.
However, he said the the cost of repayments would remain below the 2007 peak when it reached around 60 per cent of median income. This is the level the cost of repayments tends to reach before major price corrections.
The strong labour market will also help to prevent any crashes in house prices.
Wishart said the firm’s predictions were based on house price growth cooling which is yet to be seen. However, he said continued double digit growth in house prices would deteriorate mortgage affordability further, resulting in a more severe price correction.
He added: “Overall, rising interest rates make 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 curbs demand and causes house price growth to slow to a crawl in 2023, affordability would not become as stretched as prior to past corrections. That should prevent the housing market collapsing under its own weight.”