ENGLAND — Following a slew of tax cuts announced by the government that drove interest rate forecasts skyrocketing and raised lending rates for homeowners, there are mounting concerns about a property market crash in the United Kingdom.
Finance Minister Kwasi Kwarteng’s so-called mini-budget alarmed markets with £45 billion ($50.5 billion) in debt-financed tax cuts, leading to a sharp increase in the yield on government bonds. These are used by lenders to determine the cost of fixed-rate mortgages.
A brief program of long-dated bond purchases launched by the Bank of England in response to the market chaos helped to temporarily stabilize the market. But Oxford Economics Chief U.K. Economist Andrew Goodwin warned that there might still be more suffering to come, especially in the housing market.
After the repeal of the tax cut, a strategist warns that Gilts and the pound are not yet out of the woods.
Goodwin wrote in a letter on Friday that although the BoE’s temporary bond-buying program caused swap rates to decline, they still remain high and that several banks have already responded by sharply raising interest rates on their mortgage products.
“A situation where housing values drop is looking increasingly likely,” Goodwin continued, “adding to the already-strong headwinds on consumer spending.”
According to Oxford Economics, house prices are about “30% overpriced based on the affordability of mortgage payments” if interest rates stay where they are right now.
It’s difficult to see how a steep reduction in transactions and a marked adjustment in pricing can be avoided, Goodwin said. “The large frequency of fixed rates deals will assist to cushion the hit in terms of existing mortgagors,” he added.
The expected trajectory of interest rates will determine whether fixed mortgage rates remain high or start to decline in the future.
After the government reversed course on its proposal to eliminate the highest rate of income tax, these have fallen from earlier highs of over 6%, but analysts do not anticipate this to calm the market’s trepidation.
Interest rates have already increased six times this year, from 0.25% at the end of 2021 to 2.25% at the moment. For the most of 2023, markets are now pricing in an eventual rate of over 5%.
After years of low interest rates, many consumers are likely to be shocked by this.