The economic research consultancy expects the average rate on new mortgages to rise from 1.8 per cent in Q1 to 3.3 per cent by end of 2022, then to peak at 3.6 per cent in 2023 as lenders rebuild their margins. This is consistent with an abrupt slowdown in house price inflation last seen in 2008.
Andrew Wishart, senior economist at Capital Economics, said: “Lenders have been slow to pass on rising interest rates so far, so we expect a sharp rise in mortgage rates in the months ahead. For example, some banks are offering 60 per cent loan to value (LTV) mortgages at 2.2 per cent, in line with the two-year interest swap rate. If the bank rate was to rise as expected by financial markets, lenders would make no profit on such loans so it is inevitable that rates will rise further.”
The firm correctly predicted the current house price growth back in September, when it said that house prices would rise by five per cent in 2022. The consensus at the time was 1.6 per cent, but prices have already risen four per cent so far this year.
It had previously predicted that the average house price would continue to grow steadily to marginally in excess of £275,000 by 2025, but has now revised this to reflect the newly predicted downturn, pitching the 2025 predicted average at around .
The first signs that the market is turning are already apparent, with Wishart pointing to low visits to property websites and the latest RICS housing survey suggesting that quarterly house price growth will fall to zero by Q3. He added that consumer confidence had also fallen.
However, Capital Economics is not expecting a repeat of the 20 per cent crash in 2008 or 1990.
Wishart explained: “First, while the house price-to-earnings ratio is roughly the same now as in 2007 we do not anticipate a return to pre-financial crisis mortgage rates of six per cent, so the cost of mortgage repayments will remain much less of a burden.
“Second, strong pay growth means a modest fall in prices will be enough to return the house price-to-earnings ratio to a more sustainable level.”
The firm said that due to the impact of the Russia Ukrainian war along with growing post-pandemic and post-Brexit mounting import costs, general inflation has proven more persistent than anticipated. Consumer price index inflation is currently on track to peak at 10 per cent this October, the highest it will have been in 40 years, according to Capital Economics.
The consultancy has subsequently raised its prediction for the peak Bank of England base rate to go from 0.75 per cent now to three per cent in 2023, having previously forecast a two per cent peak in 2023.
This will come off the back of real household disposable income falling by around 3.3 per cent this year. This is in spite of higher wage growth now forecast than anticipated.