Bleak Autumn Statement Forecast After Mortgage Rates Jump.
House prices will fall by around 9% between the end of this year and September 2024, according to the Office of Budget Responsibility (OBR).
The change, which follows a period of record highs, will be driven by rising mortgage rates and tougher economic conditions.
The OBR's Economic and Fiscal Outlook report, published alongside the Chancellor's Autumn Statement, says that the average interest rates on outstanding mortgages will peak at 5% in the second half of 2024.
This is the highest average rate since 2008 and 1.8% points above the peak that the OBR predicted in its March forecast. The average rate will then fall slightly to 4.6% by 2028 when the forecast ends.
Ups and downs: The OBR has said that house prices will fall 9% next year before rising again into 2026 and beyond© Provided by This Is Money
However, the forecast notes that because of the relatively large share of fixed-rate mortgages (around 83% in the second quarter of 2022 compared to just 51% in 2007), higher rates on new mortgages take time to feed through to the averages.
As the economy recovers, the OBR says house prices will rise slightly faster than incomes from 2025 (at around 2.6% a year) and the house-price-to-earnings ratio will settle at around 7.
The forecasts are based on quarterly peak-to-trough measurements, which predict the highest and lowest house price growth figures in each three-month period.
This is a slightly more upbeat than prediction from estate agency Savills which has forecast house prices will fall 10% next year before rising by 1% in 2024.
As recently as May, the estate agent was forecasting just a 1% drop in 2023 but the sharp increase in mortgage rates has led to a gloomier outlook.
Rate rises: Mortgage rates climbed rapidly in the second half of the year but are set to ease off in the coming years according to the OBR© Provided by This Is Money
However, the OBR did add a caveat to its prediction, adding 'there is significant uncertainty over this forecast given the sensitivity of house prices to mortgage rates and the recent volatility in the bond yields that drive pricing in the mortgage market.'
In its financial years data the OBR predicts house prices will fall 4.2% in 2023-24 and 4% in 2024-25, before rebounding to 2.1% growth in 2025-26.
Where are mortgage rates heading?
Following the September mini-Budget gilt yields shot up, pushing up the cost of borrowing for banks.
In response lenders hiked up their own mortgage rates, ensuring they weren't caught short by the steep increase in the cost of credit by passing it on to their customers.
Before the mini-Budget on Friday 23 September the average two-year fixed rate across all loan-to-value brackets was 4.74% and the five-year fix was 4.75%, according to Moneyfacts.
Today those are 6.23% and 6.04% respectively. However, both two & five year fixed rates have come down from last month's peak of 6.65% and 6.51% for two-year and five-year fixed rate averages.
Going down: Mortgage rates have continued to fall since mid-October with the average two-year fixed rate now 6.23% across all LTVs according to Moneyfacts © Provided by This Is Money
Rates are continuing to fall. Skipton Building Society has now launched a three-year fixed rate deal at 60% loan-to-value with a rate of 5.03%.
The Co-operative Bank has a two-year fixed rate mortgage at 80% LTV for 5.89%.
Higher mortgage rates and falling house prices are two of the trends the OBR says will weigh on consumption and investment in the UK.
The ongoing squeeze on real incomes and rising interest rates will also contribute to tipping the economy into a recession lasting just over a year from the third quarter of 2022, it said.
In his Autumn Statement Hunt said his fiscal plan will mean the recession will be 'shallower and shorter' than previously forecast.
In a surprise move Hunt announced that the stamp duty cut introduced by former Chancellor Kwasi Kwarteng in his ill-fated mini-Budget in September is only temporary and will end on 31 March 2025.
Kwarteng had cut raised the house price threshold under which buyers don't have to pay stamp duty land tax from £125,000 to £250,000.
It meant home movers would save up to £2,500, and 200,000 more homebuyers every year would pay no stamp duty at all.
How long will the recession last in the UK?
Chancellor Jeremy Hunt’s autumn statement has caused a spike in Google searches about the economy.
The trending search terms include everything from what the OBR stands for to what the new rate is for the state pension.
Here are the top trending questions about the autumn statement, and some answers:
How long will the recession last in the UK?
The Bank of England forecasted last month that the country could be at the start of an eight-quarter recession, the longest since reliable records began in the 1920s.
Gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.
The economy has faced similarly long recessions in the past, but then the quarterly drops have been broken up with an occasional positive quarter.
What does inflation mean?
At its heart, inflation is a way of checking how quickly prices are rising for households across the UK.
It is an average across many categories, so if food prices rise, that could still be offset by drops in, say, the price of petrol.
Who dictates inflation prediction?
The Office for National Statistics (ONS) is tasked with estimating the UK inflation rate.
It has a basket of goods and services that it tracks. It might be helpful to think of this as a massive shopping basket containing what the ONS thinks that people in the UK buy.
It includes around 730 items, anything from dating agency fees to condoms, wild bird seed to petrol, and crumpets to pet food.
The ONS’ researchers take an average of the increase or decrease of the items’ prices from a year ago – and this is the inflation rate.
What was the rate of inflation in September 2022?
In September 2022 the rate of inflation was 10.1%, the same as the previous month.
What inflation rate is used for the state pension?
September’s inflation figures are traditionally used to set the state pension.
What is the new rate for the state pension?
Pensions are predicted by a triple lock which means that people’s pensions will increase in line with whichever is the highest of three measures: average wage growth, consumer price inflation, or 2.5%.
In his autumn statement, Mr Hunt committed to increase the state pension and benefits in line with September’s 10.1% inflation figure.
This means that the state pension should increase from £185.15 per week to £203.85 per week from April 2023 for those on the new full rate.
For those on the full, old basic state pension, who reached state pension age before April 2016, the increase means a weekly rise from £141.85 to £156.20.
What is a windfall tax?
A windfall tax is a tax levied on an unexpectedly large profit.
The oil and gas industry have made record profits in the UK following the outbreak of the war in Ukraine.
Mr Hunt said he would increase the oil and gas windfall tax from 25% to 35% from the start of next year.
However, he levied an even higher windfall tax on wind farms, with an extra 45% charge on their profits.
What does OBR stand for?
OBR stands for the Office for Budget Responsibility.
The OBR produces independent forecasts about the future of the UK’s economy.
It was created in May 2010 by newly-elected chancellor George Osborne following the general election.