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

Mortgage rates have already peaked, but house prices will fall 10% next year, Oxford Economics says, as it warns that homes are overvalued by up to 37%

  • Exchange rates will fall next year, economist Andrew Goodwin predicts
  • This will lower mortgage rates although they will remain around 5%
  • The base rate will top out at 4%, not 5-6% as markets predict, he says.
  • Home prices are overvalued by a third based on current mortgage costs

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

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

However, Goodwin says he doesn’t expect property prices to see a drastic correction if interest rates stay where they are.

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

Oxford Economics expects mortgage rates to peak in the fourth quarter of this year before falling in 2023

In the firm’s most recent research report, the impact of the Chancellor’s upcoming financial statement at the end of the month and the actions of the Bank of England are emphasized.

‘Whether mortgage interest rates remain as high in 2023 will depend on the behavior of the Government and the Bank of England.

“The Chancellor intends to present his medium-term fiscal plan on October 31, which will provide an important signal as to whether he has taken market concerns into account,” says Mr Goodwin.

This prediction is due in part to a difference in thinking between the economic analysis firm and broader market expectations.

Currently, the market anticipates the Bank of England to raise its base rate to 5 or 6 percent, while Goodwin says Oxford Economics thinks it will top out at 4 percent.

“I think in this case it’s hard for us to believe that we’re getting close to 6,” he says.

‘That should drive exchange rates and mortgage rates down next year, but they’ll still be much more expensive than they were six months ago.

“The reason why we think the Bank of England will not go up to 5 or 6 percent is a judgment based on the extent of the apparent inflation problem and how far the Bank of England is willing to go to combat it.

“We believe that the inflation problem is less serious than the market suggests and less prolonged. I’m not sure the Bank of England is prepared to deal with the kind of recession it would see at 6 per cent.

Mortgage rates have skyrocketed over the last year, making it difficult to borrow how much homeowners can borrow for the same monthly payments.

Oxford Economics expects mortgage rates to peak in Q4 2022 but remain high in 2023

And despite the current chaos in the mortgage market, with rapidly rising rates causing concern it could lead to an outright crisis if households can’t make their payments, Goodwin is pretty relaxed.

Average rates for fixed mortgages on all securities loans have risen dramatically since the Chancellor’s mini-budget on September 23.

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

However, Goodwin argues that while skyrocketing rates will hit those who need a new mortgage hardest, the impact won’t be the same for everyone.

‘If you’ve locked in a 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 that the high rate of corrections will provide us with enough insulation.

“We don’t think we’ll see a big spike in advance sales all at once because the impact will spread, it’ll be slow.”

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

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

Earlier in the week, analysts at Capital Economics said house prices will fall about 12 percent by mid-2024 as a result of sharply rising mortgage rates.

Homes are more expensive than ever compared to earnings, Nationwide's home price to earnings chart shows

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

What to do if you need a mortgage

Borrowers who need to find a mortgage because their current fixed-rate agreement is coming to an end, or because they have agreed to purchase a home, have been urged to act but not panic..

Banks and building societies continue to lend and mortgages are still being offered and applications accepted.

However, rates are changing rapidly and there is no guarantee that the deals will last and not be replaced by mortgages that charge higher rates.

This is the best Money Mortgage Rate Calculator powered by L&C that can show you offers that match the value of your mortgage and property

What if I need to re-mortgage?

Borrowers should shop around and talk to a mortgage broker and be prepared to act to secure a rate.

Anyone with a fixed-rate agreement ending within the next six to nine months should consider how much it would cost to remortgage now and consider closing a new agreement.

Most mortgage deals allow fees to be added to the loan and are then only charged when you withdraw. By doing this, borrowers can lock in a rate without paying expensive setup fees.

What if I am buying a house?

Those with agreed home purchases should also aim to lock in rates as soon as possible, so they know exactly what their monthly payments will be.

Homebuyers should be careful not to overstretch themselves and be prepared for the possibility of house prices falling from their current high levels, due to higher mortgage rates limiting people’s borrowing capacity.

How to Compare Mortgage Costs

The best way to compare mortgage costs and find the deal that’s right for you is to talk to a good broker.

You can use our best mortgage rate calculator to display offers that match your home value, mortgage size, term, and fixed rate needs.

Keep in mind, however, that rates can change quickly, so the advice is if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you. .

> Consult the best fixed-rate mortgages that you could apply for