House price crash risk as prices fall £7,500 and interest rates head to 5.5%

Money markets went crazy yesterday, after April’s inflation figure came in far higher-than-expected at 8.7 percent.

Traders were particularly worried about core inflation, which climbed from 6.2 percent in March to 6.8 percent, suggesting that underlying price pressures are rising not falling.

The Bank of England insists that consumer price growth will fall to 5.1 percent in the final three months of the year, but as we have learned lately, it’s not the most reliable of forecasters.

The BoE won’t be taking any chances after repeatedly underestimating the threat and getting a heap of criticism as a result.

Today, base rate stands at 4.50 percent, having been increased for the last 12 interest rate-setting meetings in a row.

The swaps interest rate market had been anticipating one or two more rate hikes this year at most. Today, it is pricing in three or four more rate hikes, which would lift bank rate to 5.5 percent.

George Lagarias, chief economist at Mazars, has warned that anyone who still thinks base rates will stop at five percent are “optimistic”.

He warned: “Until the Bank of England sees evidence of the vicious price-wage cycle breaking and demand conditions sufficiently tame, we should expect increasingly tighter credit conditions and pressures on consumers.”

Rising swap rates are a particular worry as banks and building societies use them to price their fixed-rate mortgages.

Sarah Coles, head of personal finance at Hargreaves Lansdown, called this “a kick in the teeth” for anybody looking for a mortgage.

It could be a kick in the teeth for house prices, too.

Bestinvest personal finance analyst Alice Haine said 1.3million homeowners on fixed-rate mortgages that are due to expire this year can expect pay an extra £200 a month on their replacement deals. “That’s hard to absorb for even the most financially prepared households.” 

The BoE is unlikely to hit its two percent inflation target for another two years, warns Ed Monk, associate director for personal investing at Fidelity International.

“Every month that rolls by means more mortgage-holders rolling onto more expensive deals.”

The global house price crash is picking up steam. So far the UK has avoided the worst but latest official data shows prices have fallen for four months in a row.

The cumulative drop is just 2.57 percent, but that’s enough to wipe £7,543 off the average house price, reducing it to £285,009. 

Over the 12 months to March, house prices are still 4.1 percent higher, but don’t be misled by that. Inflation over the same period was 10.1 percent.

Barret Kupelian, senior economist at PwC UK, says this means house prices are contracting in real terms, once inflation is taken into account.

In real terms, prices have fallen six percent. It’s a hidden house price crash, although if you ask me, that’s probably the best kind.

It takes some of the froth out of the market without causing outright panic.

Kupelian is warning of worse to come as base rates career towards 5.5 percent and the labour market cools, which may now trigger “further cooling in the housing market than originally anticipated”.

READ MORE: Investors run scared as stock markets fall again but is cash doesn’t cut it

A key reason why UK property prices have held up so far is that we do not have enough homes for our rapidly growing population.

Also, Brits are crazy for bricks and mortar, and are willing to mortgage themselves to the max.

Prices wobbled after former Chancellor Kwasi Kwarteng’s mini-Budget madness in September, when mortgage rates shot past 6.5 percent.

Jeremy Hunt restored order and until recently five-year fixed-rate mortages hovered around the four percent mark, stabilising the market.

The higher they climb from here, the greater the risk of a house price crash.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said swap rates remain volatile and mortgage rates are heading upwards.

“Santander and Halifax are just two lenders who have recently increased their rates and others are likely to follow suit, with short notice.”

The property market looks set to remain on a knife edge for some months.

Although in real terms, the crash has already begun.

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