House sales 'to drop 25%' amid mortgage rate surge

The number of house sales is likely to drop by 25% this year and not recover until 2025 given the recent rise in mortgage rates to above 6%, according to the latest analysis by research house Capital Economics.

The firm said it expects house prices to fall by a further 12% below current levels, but that if mortgages are sustained at the current 6% rate longer than expected, prices could drop as much as 25%.

The research was released late yesterday ahead of today’s crunch meeting of the Bank of England’s Monetary Policy Committee, which is widely expected to recommend a further rate rise of as much as 0.5% in a bid to combat persistent inflation.

Shares in listed housebuilders fell between two and three percent yesterday after worse than expected official inflation figures increased the chances that the Bank will be forced to raise interest rates further than expected in order to dampen down the economy.

Karen Ward, economist at JP Morgan and an advisor to chancellor Jeremy Hunt, told the BBC that the Bank of England may need to “create a recession” in order to “get rid of inflation”.

The analysis by Capital Economics said that average mortgage rates are set to soon surpass the peak reached during the mini-budget crisis last autumn raising the cost of buying a home “beyond what many can afford [and] leading to a renewed slump in transactions and mortgage lending”.

It said it had revised down its expectations for the housing market this year, and now expected a 25% drop in transactions, with no recovery until 2025, and a 12% drop in prices. The firm pointed out that given the general inflation in the wider economy, even the 4% house price drop seen so far was already a 20% “real terms” correction in prices.

It said that were inflation to continue to persist, leading to higher interest rates for longer, then “a 25% peak-to-trough fall in nominal house prices (almost 50% in real terms) would be likely.”

The prediction follow recent turmoil in the mortgage market as expectations have grown of further Bank of England action to curb inflation. The Bank has already raised its base rate, which currently sits at 4.5%, 12 times in the last 18 months.

Rob Perrins, chief executive of housebuilder Berkeley Group, yesterday said his firm was expecting sales to be 20% lower this year, given the tougher economic climate. He said: “The [housing] outlook is going to be choppy for a while until interest rates settle, which brings confidence back into the market,” adding that housebuyers needed certainty on how high rates will go.

The Institute for Fiscal Studies has said the increasing mortgage rates mean around 1.4 million people could lose a fifth or more of their disposable income to mortgage costs.

Financial markets now expect the Bank base to peak beyond 6% next year, meaning mortgage rates could go even higher. The latest data from Moneyfacts this morning has shown another rise in average mortgage rates, with the price of a two-year fixed-rate deal reaching an average of 6.19%, with the cost of an average five-year deal hitting 5.82%.

The Bank of England is due to make its interest rate decision at noon today.