Mortgage rates have peaked and house prices will fall by 10%, says Oxford Economics

According to Oxford Economics chief economist Andrew Goodwin, mortgage rates may have already peaked as the average rate for a 2-year mortgage hit 6.43 percent this week.

Based on the cost of mortgages, house prices are overvalued by up to 37 percent, according to an analysis by Oxford Economics.

However, Mr Goodwin said he does not expect real estate prices to undergo a drastic correction if interest rates remain where they are.

“Our new forecast will show a 10 percent decline in house prices year-on-year,” he told This is Money. “About 13 percent peak to trough over the next few years and compared to that mortgage affordability measure.”

In the company’s latest investigative briefing, it highlights the impact of the Chancellor’s upcoming month-end financial statement and the actions of the Bank of England.

Whether mortgage rates remain high in 2023 will depend on the behavior of the government and the Bank of England.

“The Chancellor plans to present his medium-term budget plan on Oct. 31, which will send an important signal as to whether he has taken the concerns out of the market,” Goodwin said.

This forecast is partly due to a difference in thinking between the company for economic analysis and the expectations of the broader market.

Currently, the market expects the Bank of England to raise its key rate to 5 or 6 percent, while Goodwin says Oxford Economics believes it will peak at 4 percent.

“I think in this case it’s hard to believe that we’re going to get close to six,” he says.

‘That should bring the swap and mortgage rates down next year, but they will still be much more expensive than six months ago.

“The reason we don’t think the Bank of England will go to 5 or 6 percent is a judgment based on the magnitude of the apparent inflation problem and the effort the Bank of England is willing to put in to combat it.

“We think the inflation problem is less severe than the market suggests and less long-term. I’m not sure the Bank of England is willing to deal with the kind of recession you’d see at 6 percent.”

Oxford Economics expects mortgage rates to peak in the fourth quarter of 2022, but remain high in 2023

And despite the current chaos in the mortgage market – with the rapid rise in rates worrisome and could lead to a full-blown crisis if households fail to pay their repayments – Goodwin is fairly relaxed.

The average fixed-mortgage interest rate for all securities loans has risen dramatically since the Chancellor’s mini-budget on Sept. 23.

Early last month, a two-year fixed rate on a £200,000 mortgage would have cost you £1,082 a month or £12,984 a year. This has risen by £260 per month to £1,342 while the rate is now 6.43 per cent.

However, Goodwin argues that while rising rates will hit those most in need of a new mortgage, the impact won’t be the same for everyone.

“If you’re on a flat rate that’s about to expire, you’re in the wrong place at the wrong time. But there are also many people who are not in that situation and are isolated.

“We are at the more optimistic end of expectations as we believe the high repair rate will give us adequate insulation”

“We don’t think we’re going to see a big surge in presales all at once because the impact is spreading, it’s going to be slow.”

A new report from Oxford Economics, released today, says house prices are overvalued to their highest levels since 2000, when the company first began tracking its data.

In 2007, house prices were overvalued by 25 percent, the second highest level in the past two decades, according to the data. Today, that figure is a much higher 37 percent.

Analysts at Capital Economics said earlier this week that house prices will fall by about 12 percent by mid-2024 as a result of the sharp rise in mortgage rates.

Homes are more expensive compared to income than ever, Nationwide’s home price to income chart shows