Following a slew of tax cuts announced by the government that drove interest rate forecasts skyrocketing and raised lending rates for homeowners, there are mounting concerns about a property market crash in the United Kingdom.
On September 23, Finance Minister Kwasi Kwarteng’s so-called mini-budget alarmed markets with £45 billion in debt-financed tax cuts, leading to a sharp increase in the yield on government bonds. These are used by lenders to determine the cost of fixed-rate mortgages.
A brief programme of long-dated bond purchases launched by the Bank of England in response to the market chaos helped to temporarily stabilise the market. But Oxford Economics Chief Economist Andrew Goodwin warned that there might still be more suffering to come, especially in the housing market.
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According to Oxford Economics, house prices are about “30% overpriced based on the affordability of mortgage payments” if interest rates stay where they are right now.
Many institutions that had previously banned mortgage arrangements for new clients are again back on the market at much higher rates.
Anticipated Interest Rates
The expected trajectory of interest rates will determine whether fixed mortgage rates remain high or start to decline in the future.
After the government reversed course on its proposal to eliminate the highest rate of income tax, these have fallen from earlier highs of over 6%, but analysts do not anticipate this to calm the market’s trepidation.
Interest rates have already increased six times this year, from 0.25% at the end of 2021 to 2.25% at the moment. For the most of 2023, markets are now pricing in an eventual rate of over 5%.
After years of low interest rates, many consumers are likely to be shocked by this.
According to senior vice president of DBRS Morningstar Maria Rivas, banks will probably continue to be cautious when underwriting and pricing residential mortgages and other loan products in the months to come given the combination of anticipated additional interest rate increases and a slowing economy.
The average mortgage rate will eventually increase by about two percentage points. Pickering claimed that because British banks are well-capitalised and typical household finances are currently “strong,” this should not pose any “major financial stability threats” to the United Kingdom.