The growing gulf gap between wages and house prices risks causing another financial crisis, economists have warned.
It is feared that the increasing strain on household finances caused by rising costs will divert vital spending from the economy, a report reveals today.
Property prices will climb a further 8pc over 2022 and by 2024 will be 26pc higher than they were pre-pandemic, according to new analysis by EY Item Club, an economic forecaster.
Peter Arnold, of Ernst & Young, the accounting firm that sponsored the report, said: “The gap between house prices and incomes means more indebted households, leaving the economy vulnerable to another financial crisis.”
The soaring cost of living and rising interest rates will not trigger a near-term house price crash, but rising house prices will bring long-term challenges for the market, he said.
“One of the risks of ever-increasing house prices is that people really stretch themselves, particularly first-time buyers. There is a risk that they take on too much debt in proportion to their income. If we circle forward five or 10 years, what is happening now may be creating risks for the future. We could get another situation like in 2007.”
The ratio of average mortgages to incomes has hit 3.4, the highest level since records began in 1992.
The more debt buyers have to take on, the greater the risk of a financial crisis in which borrowers default on their mortgage debt.
Expensive housing also channels investment into construction, moves household savings into property rather than productive businesses, stops consumers spending cash in other sectors and creates unsustainable levels of inequality, the report said.
But in real terms, adjusted for inflation, house prices could start to fall next year. Falling household incomes, rising mortgage rates and stretched affordability mean EY has forecast growth to plunge to 1.8pc and 1.2pc over 2023 and 2024 respectively.
However, a shortage of supply, low unemployment, and the fact that people with housing wealth are more protected from the cost of living crisis will prevent a house price crash over this period, EY said.
Homeowners typically have a gross annual income that is 29pc higher than that of private renters. Those on higher incomes also hold the bulk of the £180bn in additional savings British households accumulated over the pandemic.
The new dominance of fixed-rate mortgages will insulate the market from much of the immediate pain of interest rate rises, Mr Arnold added. In 2021, a fifth of mortgages were on variable rates, down from 70pc a decade earlier.
A rise in both outright homeownership and renting also means fewer households are exposed to the mortgage market at all. In 2005, 40pc of households had a mortgage, compared to 30pc in 2019-20.
Martin Beck, of the EY Item Club, said: “Interest rates have become a much smaller risk factor to house prices than unemployment.”
Unemployment is a key lead indicator for the housing market because it filters directly into forced sales. If people lose their jobs, they can no longer afford their mortgages and they have to sell up quickly. This is a looming risk as the prospect of a recession grows.
The Centre for Economics and Business Research, a consultancy, has already forecast a technical recession, anticipating two consecutive quarters of GDP this spring and summer. It expects a corresponding rise in unemployment from the 3.8pc recorded in the three months to April, to 4.3pc by the end of 2022.
Mr Arnold said: “If a slowdown in the economy brings a rise in unemployment, that could trigger a decline in house prices.”
The cost of living crisis could also feed to the wider housing market in other ways. If tenants cannot pay their rent, landlords could be forced to sell, which in turn could depress house prices, the report said.