House prices will fall over the next two years as a result of higher mortgage rates, Lloyds Bank warned.
After pandemic lockdowns fueled red-hot activity in the property market, Lloyds now expects house prices to fall 7.9 percent in 2023 and 0.5 percent in 2024, before rebounding in 2025.
In a “severe” economic slump, the bank added, prices could fall by 17.9 percent next year and continue to fall until at least 2026.
While lower home prices can be painful for homeowners trying to sell, they will be welcomed by new buyers. William Chalmers, the banking group’s finance chief, said: “We are likely to see a slight slowdown in mortgage lending over the next 12 months in response to slightly higher interest rates and the slightly more difficult macroeconomic environment. ‘
Economists have sounded the alarm about falling house prices as interest rates skyrocketed, making mortgages more expensive.
The Bank of England has been raising interest rates since December and is expected to jump back into action next week, raising the base rate from 2.25 percent to 3 percent.
Mortgages are also affected by government bond yields, essentially the interest payments that investors demand to lend to the government.
Gold yields skyrocketed in the wake of Kwasi Kwarteng’s mini-budget as markets worried about how much the government would have to borrow to fund tax cuts.
This pushed mortgage rates above 6 percent after the ex-chancellor’s mini-budget, from just over 2 percent a year earlier.
While gold yields are now back to pre-Kwarteng levels, mortgage rates have fallen more slowly. Chalmers said Lloyds would watch the markets settle “to determine the right pricing strategy to capitalize on.”
It came as Lloyds raked in profits of £1.5bn in the three months to September, boosted by rising interest rates.
A higher base rate set by the Bank of England means that lenders can charge borrowers more, but not raise the savings rate as high, allowing them to make a bigger profit on the difference.
This so-called net interest income at Lloyds reached £3.4 billion in the three months to September, up 19 percent on the previous year. Profits were squeezed as the bank set aside £668 million to prepare for loans that soured as the economy plunged into a downturn. But so far, the bank said, it has seen few signs that customers are struggling.
According to the Office for National Statistics, the price of an average home in the UK hit a record £296,000 in August, up from £36,000 from a year earlier. But the rate of growth has slowed, from 16 percent in the year to July to 13.6 percent in the year to August. Lloyds shares rose 0.5 percent, or 0.23p, to 42.78p.
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