UK house prices could plunge next year as interest rates surge and lenders hike their mortgage rates, analysts warned.
With an estimated 2mln-plus households facing big jumps in their mortgage payments over the next two years, this has heavily tilted the market towards a potential price crash, which has sent shares in banks and housebuilding companies such as Barratt Developments PLC (LSE:BDEV) and Berkeley Group Holdings PLC (LSE:BKG) sliding in recent days, among other factors.
Ray Boulger at mortgage broker John Charcol predicted house prices could drop 10% in 2023, while analysts at Credit Suisse and economists at Capital Economics said prices could slump between 10% and 15% amid higher interest rates and the ongoing recession.
Following the sell-off of gilts that was sparked by the new chancellor Kwasi Kwarteng's mini-budget last week, the market has predicted interest rates rising to 5-6% by next summer.
This, Boulger told BBC radio, “makes it very difficult to know where to price mortgage products” and said it would definitely effect people's ability to buy houses.
"We can expect to see a significant fall in house prices, perhaps 10% next year," he said.
Economist Andrew Wishart at Capital Economics said: “The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer.
“The resulting drop in buying power makes a significant drop in house prices inevitable,” he said in a note on Tuesday evening.
Lenders including Halifax, Santander, HSBC Holdings PLC (LSE:HSBA) and Skipton Building Society have pulled mortgage products over the past few days following the sharp rise in expected interest rates, which caused wholesale funding costs to surge.
Mortgage brokers said some mortgages at higher loan-to-value rates could be withdrawn entirely because of concerns about affordability and the housing market's stability.
Wishart said his company's measure of the interest rate retail banks borrow at has jumped from 3.6% at the start of the month to 5.0% now, well above the average quoted mortgage rate of 3.6% in August.
Lenders pulled their products as otherwise they would have been agreeing to mortgages on which they would make a loss, he said.
An average household refinancing a two-year fixed rate mortgage in the first half of next year would see monthly repayments jump from £863 to £1,490, according to calculation from Pantheon Economics.
Yesterday Nationwide became the first big mortgage lender to increase their fixed-rate deals, hiking its two-year rate to 5.59% from what was being offered at 2.54% three months ago.
This increase would see a family with a £500,000 mortgage spending an extra £881 a month on repayments.
Shares in FTSE 100 housebuilder Barratt fell over 15% in the three and half sessions since the mini-budget, with Bellway PLC (LSE:BWY) tumbling 18%, Berkeley Group Holdings PLC (LSE:BKG) are down 11%, and others such as Taylor Wimpey PLC (LSE:TW.), Vistry Group PLC (LSE:VTY), Crest Nicholson PLC (LSE:CRST) also subsiding by similar amounts.
Bank shares have also been sold off, with Lloyds Banking Group PLC (LSE:LLOY) down almost 13%, NatWest Group PLC (LSE:NWG) down 12% and Barclays PLC (LSE:BARC) down 11%, with more internationally focused HSBC Holdings PLC (LSE:HSBA) and Standard Chartered PLC (LSE:STAN) down 7-8%, but challenger banks OSB Group PLC (LSE:OSB) and Virgin Money UK PLC (LSE:VMUK) both falling more than 13%