First time buyers see hopes destroyed amid interest rates and rising rents

UK property prices are set to drop by as much at 12 per cent as those looking to land their first home see their buying power destroyed, economists warn.

The warning comes as the average interest rate for a two year fixed rate mortgage surpassed 6 per cent for the first time since 2008, according to financial data provider, Moneyfacts.

The market has already started to cool, even before accounting for a recent surge in mortgage rates. Average house price fell by per cent between August and September, according to mortgage lender Halifax.

Meanwhile, renters face a more than 20 per cent increase in rental costs over the next five years, according to a forecast from estate agent Knight Frank.

First time buyers do not just face rising rents, they must also grapple with the full force of rising costs across the economy from energy bills to groceries.

“That destruction of buying power prices first time buyers out of the market. Many simply now can’t afford to buy at current prices,” Andrew Wishart, property economist at consultancy Capital Economics told The Independent.

And while the average house price is set to fall by around 12 per cent by the end of 2024 according to Capital Economics, inflation is also expected to rise further, eroding savings for house deposits. The Bank of England has forecast that inflation could reach 13 percent in January next year.

A weakening position for renters and first time buyers has an impact on the outlook for the housing market as a whole, Mr Wishart said: “Once that happens, it spreads up further towards the middle and upper end of the market.”

“It’s going to be very hard to get on the housing ladder in the next year. You also don’t want to buy into a falling market at a high interest rate,” he added.

Lenders are required by City watchdog, the Financial Conduct Authority (FCA), to ensure that borrowers can afford their repayments on a mortgage, even if rates rise. Given market expectations for rate hikes, the average loan to income ratio – a yardstick by which to measure repayment costs – could drop from 4 to 3.7 by next summer.

In practical terms, that would reduce the maximum mortgage a typical first-time buyer household with an annual income of £55,000 could secure, from £275,000 to £203,000, according to Mr Wishart.

The UK is not the only market where rising interest rates are taking a toll on prospective homeowners and renters. Central banks are trying to curb inflation by raising interest rates across developed economies, including the US Federal Reserve.

However, the Truss’ government’s handling of the mini-budget and the resulting market volatility sped up the rise in mortgage interest rates, economists and investors said.

The housing market will not be able to  “withstand rates going to 5 or 6 per cent” said Mark Dowding, chief investment officer at Bluebay Asset Management in a note.

And the ‘mini’ budget “is likely to have done more to harm confidence and push the economy into recession, than it has done anything that will boost aggregate demand”, he added.

Rising debt costs tend to make businesses and consumers more pessimistic but this was made worse by recent political interventions, economists said.

“The huge volatility caused by the mini budget has hit people’s confidence,” said Suren Thiru, Economics director at the Institute for Chartered Accountants in England and Wales (ICAEW).

“It’s not just the impact of the mini-budget itself, though. It’s the new prospect of Austerity 2.0,” he added, noting suggestions from the prime minister and chancellor that there will need cuts to public spending in order to fund tax cuts.

The cost of government borrowing rose sharply in the aftermath of chancellor Kwasi Kwarteng’s mini-budget and triggering intervention in the bond market by the Bank of England.

Market expectations for inflation and interest rates climbed as they parsed the effects of expansive tax cuts laid out by Mr Kwarteng last month. Investors were also rattled by a lack of clarity over what the policies would mean for the UK’s public finances in the absence of the usual assessment from independent watchdog, the Office for Budget Responsibility (OBR).

Liz Truss and Mr Kwarteng rowed back on plans to cut the 45 per cent tax rate for high earners and said they would work with the OBR to provide economic and fiscal forecasts alongside spending plans by next month, after rejecting the OBR’s previous offer of fresh forecasts in time for the mini-budget.

Ms Truss has said that the government is helping first time buyers by raising the stamp duty threshold, a tax on property transactions, from £300,000 to £425,000.

Economists do not expect this to outweigh the larger impact of higher borrowing costs on the housing market.

On Thursday Mr Kwarteng met with mortgage providers, and banking chiefs urged him to consider an extention of the Government’s mortgage guarantee scheme in order to manage the risks of lending to new borrowers.