House prices could fall 12% by 2024as average mortgage rates reach 6%

House prices will fall by about 12 percent in mid-2024 as a result of the sharp rise in mortgage rates, analysts at Capital Economics said.

The warning comes after average fixed-rate mortgage deals rose to more than 6 percent last week as lenders continued to push rates in response to the rapidly rising cost of borrowing.

Last Thursday (Oct. 6) the average two-year fixed interest rate rose to 6.11 percent and the average five-year interest rate to 6.02 percent, according to Moneyfacts.

On the first of the month, both average rates were well below 6 percent at 5.43 percent and 5.23 percent respectively.

Capital Economics said that as mortgages become more expensive, the impact on home prices would become more severe.

Andrew Wishart, senior real estate economist at the research firm, said: “Two-thirds of buyers use a mortgage.

‘So for most buyers, the amount they can spend on a house is determined by the amount of their investment plus the amount of the mortgage they can take out.

“The jump in mortgage rates from 1.5 percent last fall to 6 percent today will reduce the mortgage loan buyers can afford and lenders are willing to offer.

‘We think that the immediate purchasing power of higher interest rates makes a sharp fall in house prices inevitable.’

Wishart added that mortgage affordability is a reliable indicator of downward pressure on home prices, as higher mortgage rates drive many buyers out of the market until home prices fall sufficiently.

The monthly cost of a 20 percent mortgage on a mid-price home has usually taken up about 40 percent of a household’s median, full-time disposable income, he said. At the current house price level and with rates of around 6 percent, however, the cost of repayment would rise to about 60 percent of that income.

Higher costs: As interest rates have risen, the affordability of mortgages has been pushed down as mortgages take up a higher percentage of income

Last week, Halifax’s latest house price index revealed that prices had fallen 0.1 percent in September, compared to 0.3 percent in August, prompting some experts to suggest that the market was beginning to turn.

The average house price in the UK is now £293,835, slightly down from the previous month’s record high of £293,992.

The latest Nationwide index, released in late September, said that while house prices grew a total of 9.5 percent year-on-year, typical real estate prices were unchanged between August and September — the first time this has happened since July 2021.

Raymond Boulger, senior mortgage technical manager at brokerage John Charcol, told This is Money: “I expect Nationwide’s year-over-year index, currently 9.5 percent, to turn negative in March or April next year and now think that the prices, which peaked in August, will fall by about 15 percent.’

Others have also predicted that house prices will fall next year.

Ashley Thomas, director at mortgage broker Magni Finance, said: ‘On the downside’ [of the market]I think there is a good chance that prices will fall as those who will be most affected by the significant rise in mortgage rates.

“At the top, I think it will probably stay the same. A couple of reasons for this, the main one being that demand for housing above £1million is still very high, supply is still limited.’