House prices to go into reverse as mortgage rates double

House prices are to go into reverse as mortgage rates double by the end of the year in the sharpest rise since 1990, economists have warned.

Analysts at Capital Economics predicted a 5pc drop in house prices over 2023 and 2024, undoing a fifth of the surge in property values since the pandemic began.

The fall in house prices is predicted to be brought on by a jump in the average mortgage rate from 1.6pc at the start of this year to 3.2pc at the end of the year and a peak of 3.6pc in mid-2023.

Andrew Wishart at Capital Economics, said: “That would be the sharpest rise in mortgage rates since 1990.”

The predictions came as Lloyds Banking Group, the UK’s biggest mortgage lender, warned inflation could result in higher defaults on its loans.

Capital Economics forecast that house prices will keep rising this year, up by 9pc at the end of 2022 compared with 2021.

But rising borrowing costs will squeeze buyers’ ability to bid ever-more for property, bringing prices back down by 3pc next year and a further 1.8pc in 2024.

House prices hit a new record high in February at an average of £277,000 across the UK, according to the Office for National Statistics, up almost 11pc on the year.

Mr Wishart said: “The resulting peak-to-trough fall of 5pc would reverse just over a fifth of the surge in prices since the pandemic began.

“The first signs that the market is on the turn are already appearing,” he said, with visits to property websites falling and consumer confidence diminishing.

Lloyds said on Wednesday that while borrowers’ arrears remained below pre-pandemic levels, it was braced for these to rise as the cost-of-living crisis hits households.

Charlie Nunn, chief executive, said: “We are proactively contacting customers where we feel they may need assistance and will continue to help with financial health checks and other means of support.

“We encourage customers, where affected, to get advice early and talk to us.”

It came as Lloyds posted a 14pc drop in pre-tax profits between January and March to £1.6bn, down from £1.9bn a year earlier.

Capital Economics’ forecast is based on a prediction that the Bank of England will have to keep on raising interest rates to 3pc next year.

So far officials, led by Andrew Bailey, the Governor, have increased the base rate from 0.1pc in December to 0.75pc now.

They are expected to push rates up to 1pc at next week’s policy meeting. Despite the increases, mortgage rates of 3.6pc will still be well short of pre-financial crisis rates of around 6pc, limiting the damage for homeowners.

Mr Wishart said: “We are not expecting a repeat of either 2008 or 1990, when house prices fell by about 20pc. 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 6pc, 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.”