Mortgage rates will peak at an average of 3.6% in 2023, double the 1.8% seen in Q1 2022, Capital Economics predicts.
That would be the sharpest rise in mortgage rates since 1990, consistent with an abrupt slowdown in house price inflation.
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% LTV mortgages at 2.2%, in line with the 2-year interest swap rate. If Bank Rate were to rise as expected by financial markets, lenders would make no profit on such loans so it is inevitable that rates will rise further.”
It comes as the economists are also predicting drop in house prices. It had forecast a further small rise in house prices next year, however, it now expects them to fall by 3.0% in 2023 and 1.8% in 2024.
The resulting peak-to-trough fall of 5% would reverse just over a fifth of the surge in prices since the pandemic began.
Wishart added: “The first signs that the market is on the turn are already appearing. Google trends show that visits to property websites dropped back to their lowest level since May 2020 this month, and the RICS housing survey suggested that quarterly house price growth will cool to zero by Q3.
“Meanwhile, GfK consumer confidence plummeted to -38 in April, close to the all-time record low of -39 in 2008.
“However, we are not expecting a repeat of either 2008 or 1990, when house prices fell by about 20%.Â
“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 6%, 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.”
