House prices could plunge by a third, experts warn

Soaring interest rates could result in a substantial reduction in house prices next year, experts have warned.

The Bank of England has warned of significant increases to the base rate to help guard against increased inflation after sterling tumbled against the dollar following chancellor Kwasi Kwarteng's mini budget on Friday.

With mortgage payments set to significantly increase as a result, and with inflation continuing to rise, experts predict a tumble in the housing market.

Ian Mulheirn, the chair of Generation Rent and executive director of the Tony Blair Institute, told Newsnight: “It would be very hard for buyers to pay the prices that houses are currently at, so we could be looking at drops [of house prices] of a third in real terms.”

The warning comes amid continued market turmoil following the mini budget, in which Kwarteng revealed plans to massively slash taxes, in particular for the UK's highest earners, and to vastly increase government borrowing.

Just a few weeks after Liz Truss took office, Tory MPs are already hitting out at her approach, with one prominent backbencher calling his party leader’s plan “inept madness”.

It comes as the Bank of England was forced to launched an emergency bond-buying programme to prevent borrowing costs from spiralling out of control and to stave off a “material risk to UK financial stability”.

Rising interest rates mean homeowners who are due to come off their fixed rate deals face a large increase in borrowing costs.

According to UK Finance, 600,000 fixed rate mortgages are due to end in the second half of 2022, and 1.8 million are due to end in 2023.

Homeowners may be forced to sell their properties as monthly payments become unaffordable, causing a price crash in the house market.

Lending giants are already hiking their mortgage rates and withdrawing products following the market turmoil prompted by Kwarteng's announcements.

Even once lending resumes, analysts say that borrowers would face higher costs – making house buying and existing mortgages unaffordable for many.

Housing market analyst Neal Hudson told the Financial Times: “For the last few months, we’ve known this is a possibility but it’s looked like the worst-case scenario. Now we are heading for that scenario.

“I’m still not 100% certain the market will crash… but it’s the main assumption now,” he added.

It comes as Britain’s biggest banks are set to be stress tested against scenarios more severe than the 2008 financial crisis, to see whether they can withstand inflation rocketing to 17% and interest rates hiked up to 6%.

The Bank of England will put eight of the UK’s leading banks under a hypothetical scenario to determine how resilient the sector is against severe but plausible recessions.

It will imagine a housing market crash whereby property prices will plummet by around a third over the first year and commercial property prices will slide 45% during the duration of the five-year scenario.

The worst-case scenario imagines inflation peaking at 17% in 2023 and averaging at 11% over three years, UK GDP falling by 5% over the first year, and UK unemployment more than doubling to a peak rate of 8.5%.

Watch: Mortgages director at UK finance company compares today's market to past turmoil

Banks will be tested against interest rates spiking to 6% in early 2023 before gradually reducing to under 3.5%.

The purpose of the stress tests is to ensure that major lenders can “absorb rather than amplify” economic shocks, to support UK households and businesses effectively, the Bank of England said.

It emphasised that the doomsday figures used for the tests are not a forecast for the future economy, but are feasible events.

The chancellor insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth and is stepping up efforts to reassure the City about his economic plans.

It comes after the International Monetary Fund (IMF) criticised the government’s strategy and urged Kwarteng to “re-evaluate the tax measures”.