Bloomberg Intelligence’s UK Housing Pulse report for June said “upheaval” in the mortgage market would lead to a drop in house prices as the “pool of buyers shrinks” and some homeowners sell up.

However, Bloomberg Intelligence (BI) predicted that this would not be as pronounced as during the global financial crisis.

Iwona Hovenko, senior real estate analyst at BI, said: “Soaring mortgage rates – as peak Bank of England rate predictions surged by 100 bps in just one month due to persistent inflation – pose a renewed threat to UK housing activity and prices.

“The shift risks undoing the fragile progress made earlier this year from the lows of Q4, suggesting the woes of UK homebuilders Persimmon, Barratt, Taylor Wimpey, Bellway and Berkeley may last longer than we previously anticipated.”

In their most recent financial updates, Persimmon said its housing completions had dropped by 42% annually, and added that the year ahead looked uncertain. Barratt also said the second half of 2023 was unpredictable, while Bellway said higher rates could dent first-time buyer demand.

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Market predictions drive instability

BI said expectations for higher rates risked impacting the housing market before the Bank of England even increased the base rate, as this had an effect on activity. For example, higher than expected inflation in May and wage growth in June fuelled speculation that the base rate could reach 5.75%, compared to a prediction of 4.8% previously.

This then caused a spike in swap rates which subsequently pushed up mortgage rates.

Hovenko added: “The recent sharp mortgage rate hikes will hit UK housing sentiment, especially given the fragile rebound from post-mini Budget lows in Q4. While surging rates may add urgency for buyers who have already secured a more attractive mortgage offer, other house hunters may delay purchases until rates fall and housing market headwinds ease.

“Soaring rates may create a spiral of panic among homeowners looking to remortgage before rates rise even more, which may fuel more hikes as lenders withdraw cheaper deals to curb applications.”

BI said with the central bank’s rate expectations remaining volatile, lower inflation could moderate these predictions and offer respite for the UK housing market. However, the firm said this would require “several months of consistently falling inflation”.

A dip in approvals

BI said higher rates could cause mortgage approvals to slow down or plateau in the second half of the year.

It also said the removal of an affordability stress test at 3% higher than a standard variable rate would only offer borrowers “limited support”.

Tomasz Noetzel, banking analyst at Bloomberg Intelligence said: “Since 2021, several lenders lifted the loan cap to 5.5 times income. We believe significant softening is possible as the government lobbies banks for support for consumers most affected by the inflationary squeeze on income. Lenders may be more flexible with refinancing since mortgage holidays aren’t on the agenda.”

BI said with average rates set to rise to more than 6% for a 75% loan to value (LTV) mortgage by November, the value of monthly mortgage approvals could fall below £20bn, compared to the initially projected £25bn.

Noetzel added: “An increase in remortgaging – more likely on five-year fixed terms – could partly offset the drop in first-time buyer volume as higher interest rates and a painful squeeze of households’ disposable income slowly alter banks’ mortgage growth mix.

“April’s new homebuyer mortgage approvals fell below £1bn after recovering from January’s low level, and we don’t expect that trend to change significantly in the coming months, with some lenders pulling mortgage offers in response to rising interest rate expectations.”