Housing slowdown warning after mortgage rates rise

There have been fresh warnings of a housing slowdown after the number of people struggling to pay mortgages was forecast to hit a 15-year high.

House sales in September hit their lowest levels since the height of the pandemic, the Royal Institute of Chartered Surveyors (RICS) said.

Rising mortgage rates will drive house prices down this year, it warned.

On Wednesday, the Bank of England said the number struggling to pay mortgages would rise sharply next year.

New house buyer inquiries fell in September, marking the fifth month in a row they had fallen, according to RICS.

It said there continued to be fewer properties for sale which had helped push up housing prices by a small amount, but it warned this was likely to end.

RICS chief economist Simon Rubinsohn said although house prices were still rising, "storm clouds" were gathering over both pricing and sales.

"It is difficult not to envisage further pressure on the housing sector as the economy adjusts to higher interest rates and the tight labour market begins to reverse," he said.

"For now, mortgage arrears and possessions remain at historic lows but they are inevitably going to move upwards over the next year, as pressure on homeowners grows," he added.

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"However, as lenders have been a lot more cautious through this cycle, with high loan-to-value mortgages accounting for a much smaller share of the lending book than in the past, this should help to limit the adverse impact on the market."

The Bank of England's quarterly survey of banks and building societies on credit conditions found that mortgage lending between July and September fell and is expected to decrease again in the final three months of the year. Conversely, lending for remortgaging grew in the third quarter and is forecast to increase between October and December.

Mortgage rates, which had been rising since the Bank of England started to increase interest in December, shot up sharply after the government's mini-budget in September sparked alarm among investors.

The promise of huge, unfunded tax cuts led to expectations that the Bank will have to raise interest rates more aggressively than previously thought, and mortgage providers are pricing their loans accordingly.

On Thursday, the average two-year fixed mortgage rate was 6.46%, according to researcher Moneyfacts, the highest since 2008. The average five-year fixed deal was 6.28%, also close to a 14-year high.

'Increasing pressure'

The Bank of England said many households would struggle if interest rates rose as high as the market expected them to, with it hitting both mortgage holders and renters.

Currently it says around 1.7% of UK households - or 475,000 - are in a position where they are more likely to experience repayment difficulties. It defines that as having to spend more than 70% of their take-home pay on mortgage or rent and essentials.

But it believes that percentage will rise to 2.8% - or around 800,000 households - by the end of next year.

"Rises in the cost of living and interest rates will increase pressure on UK household finances and make households more vulnerable to shocks," the Bank's Financial Policy Committee said in a report on Wednesday.

"Some may find it harder to repay debts," it added, unless they can make significant spending cuts.

However, it also said households were better placed to deal with financial stress than in the past, having less debt relative to their incomes.

The share of people with high loan-to-value mortgages is also much lower.

"This reduces the risk of them defaulting on debt and banks are now required to be flexible in their response," the Bank said.

It forecasts that about 1.7 million of the country's 11 million mortgage holders will have to refinance their loans in the coming year, moving onto much higher rates.