The housing market can only defy gravity for so long Business

However, if, as Capital Economics predicts, interest rates hit 3% and banks start pulling their horns passing the cost onto mortgage borrowers, the cost of servicing the same mortgage on the same home will likely consume more than half of a standard disposable household income. If interest rates hit 4%, we would be in for a world of pain.

And remember: each month that inflation exceeds earnings growth, disposable income will be eroded slightly in real terms. The Bank of England expects real disposable incomes to fall 3.25% this year, the biggest drop since records began in 1990, before falling again over the following 12 months.

Capital Economics said it believed house prices could fall 5% over 2023 and 2024. It detected signs the market could already be turning, with data from Google showing visits on real estate websites had fallen to their lowest level since May. 2020. Data released last week showed monthly house price growth slowed to 0.3% from 1.1% in March – a much faster deceleration than economists had expected.

The rise in interest rates will, of course, primarily affect borrowers with variable rates. Fortunately, there aren’t many in the UK. However, the next in line will be those with fixed short-term deals. And there are plenty of such borrowers – indeed, nearly half of fixed-rate stock is less than two years old. Some 1.5 million fixed-rate mortgages are due to expire this year and a similar number next year, according to data from trade association UK Finance.

So UK property prices can probably withstand a year or two of higher interest rates; continued demand for homes will likely prevent a crash. But if rates rise above 3% and stay high beyond the end of next year, landlords will face almighty pressure – just in time for the next general election.