House sales to plunge as mortgages on course to be most expensive in 30 years

·3-min read
House Prices Sales Plunge Mortgage Rates Interest Bank of England
House Prices Sales Plunge Mortgage Rates Interest Bank of England

House sales could soon plunge as mortgages look to become the most unaffordable on record since 1990, experts have warned.

The Bank of England increased the Bank Rate by 0.5 percentage points to 2.25pc on Thursday, the highest level since 2008.

The average monthly mortgage bill has now risen to £1,150, a jump of £349 since the beginning of the year, according to estate agency Savills. After yesterday's Bank Rate rise, a typical buyer purchasing a £300,000 home with a £280,000 mortgage will pay an additional £65 a month, snowballing to an extra £780 a year.

In turn, rapidly escalating mortgage rates could make homes the most out of kilter with earnings they have been since the early 90s, according to research by BuiltPlace analysts.

In July, the gap between the mortgage bill on an average home and what a typical person could afford to pay was already 17pc, according to Neal Hudson, of BuiltPlace.

This was based on an effective mortgage rate – the average rate across all outstanding mortgages – of 2.3pc. If mortgage rates climbed to 4pc, the “overvaluation gap” would widen to 40pc, Mr Hudson warned.

This would be the biggest gap between house prices and what the average person can afford to pay since September 2008 – just as the financial crisis was triggering a near-20pc fall in house prices.

In some ways, this affordability crunch has already hit. For a buyer entering the market now, mortgage rates already well exceed 4pc.

The average rates for two and five-year fixed-rate deals at the start of September were 4.24pc and 4.33pc respectively, according to Moneyfacts, an analyst.

If the gap between actual house prices and what a person can afford to pay is 40pc, that means house prices would need to fall by 29pc before they came back in line with the affordability benchmark, Mr Hudson said.

Mr Hudson’s calculations were based on the difference between national house prices, as recorded by the Office for National Statistics, and the amount an average single earner could afford to pay, if they spent 30pc of their wages on their mortgage bill. The calculations assumed a buyer had a 25pc deposit and took a mortgage over a 25-year term.

The picture could quickly become even more bleak. Andrew Wishart, of Capital Economics, said: “A rise in mortgage rates to as high as 6pc looks increasingly possible.”

With mortgage rates at 6pc, the gap between the mortgage bill on an average home and what a typical person could actually afford to pay would widen to 71pc, Mr Hudson said.

This means homes would be the most “overvalued” on record since September 1990. Back then, house prices also fell by a fifth, but the housing downturn was more protracted, lasting for four years.

“In the late 80s and the 00s, the ONS values were higher than this theoretical house price, and that was when the market definitely looked like a bubble. The difference can be sustained for years, but eventually something needs to give,” Mr Hudson said.

If the valuation gap hits 71pc, the corresponding price drop for homes to become “affordable” again would be 42pc, he added.

“If mortgage rates did get to 6pc, we would be looking at something pretty disastrous for house prices.”

In this situation, however, it would be highly likely that the Government would intervene, Mr Hudson said. Prime Minister Liz Truss is already reportedly planning a stamp duty cut for Friday’s mini-Budget to boost the property market.

Mr Hudson said: “Our primary expectation for the future of the housing market is still stagnation – prices stuck at high levels thanks to sellers’ sticky expectations but fewer buyers, leading to much lower turnover. However, the combination of factors is increasingly suggesting that we might see a significant fall in house prices.”