Hopeful first-time buyers who are holding off on potential house purchases while they wait for prices to fall are in for a nasty shock.
Interest rate rises will push up monthly mortgage costs so dramatically that even a 10pc house price fall will not make homes cheaper to buy than at the start of the pandemic, new analysis shows.
The Bank of England is steadily raising interest rates in a bid to tame soaring inflation, which has hit a 40-year high. As the Bank Rate rises, lenders are raising their mortgage rates fast.
This means even if the purchase price of a property falls, buyers will still face higher monthly bills because of the higher interest payments to their lender.
In January 2020, before the pandemic hit Britain, a typical couple spent 17pc of their pre-tax salaries on their monthly mortgage payments, according to Pantheon Macroeconomics, an analyst. This was below the average of 18.5pc for the preceding 20 years, as low interest rates meant mortgage payments were comparatively cheap.
Since the Bank started raising rates in December 2021, the share of salary needed to cover the mortgage payments on an average home has risen to 20.6pc. This is the highest share since September 2008, when wages plunged during the global financial crisis.
As rates rise further, Pantheon expects the share to peak at 23.5pc in September. It described the jump as “colossal”.
This means house prices would need to fall by 10pc over the next 18 months for mortgage costs to fall back to 18.6pc of income, roughly in line with the benchmark of the 2000s and 2010s.
The Centre for Economics and Business Research, a think tank, by contrast, has just downgraded its house price forecast for 2023 from a drop of 3.4pc to a 3.7pc fall. But this still comes far short of a 10pc drop.