House prices are tipped to fall as much as 15 per cent against a predicted backdrop of rising unemployment, further inflation and an imminent recession.
Credit Suisse’s global equity strategy head, Andrew Garthwaite, and his team said yesterday (September 27) that monetary tightening will be essential to offset chancellor Kwasi Kwarteng’s latest tax cuts, which he dubbed the largest fiscal boost to GDP in 50 years.
While unemployment is currently at a 42-year low and wage growth is 3 per cent higher than it needs to be to hit the Bank of England’s inflation target, Credit Suisse said unemployment will have to rise to around 6 per cent to control wage growth and to get inflation back to target.
The 8 per cent decline in sterling since August 1, the bank's analysts said, will add a further 1.3 per cent to near-term inflation. Currently, inflation is at 9.9 per cent in the year to August.
The analysts believe monetary tightening will leave the UK requiring a recession to sort out its supply side constraints. “House prices could easily fall 10 to 15 per cent," they said.
This forecast paints a very different picture to that painted by analysts just months ago. Back in June, Santander’s chief economist Frances Haque forecasted 2 per cent house price growth by year end and “zero growth” going into the new year.
She did, however, say her forecast depended on what happened to bank rates.
Yesterday, the central bank said it will “not hesitate to change interest rates” in response to market turmoil following the government’s mini-Budget on Friday (September 23) and the subsequent crashing of the pound.
Credit Suisse said in its latest report that a 6 per cent base rate "look[s] possible". It added: "To offset the fiscal stimulus of 1.6 per cent of GDP, base rates might have to be 2 per cent higher than otherwise. This could easily push base rates to 6 per cent.
"It is quite possible that the BoE ends up raising rates to 6 per cent to compensate for the weakness of sterling, the higher inflation resulting from the fiscal boost. 5.5 per cent appears priced into markets."
With volatile swap rates making it difficult for lenders to price their mortgages, swathes of the market have withdrawn products since the end of last week. Many have removed all their fixed rate products.
Santander and HSBC were the latest big lenders yesterday to pull products. Santander pulled 28 fixed rate deals, while HSBC removed all new residential and buy-to-let products “with immediate effect”. HSBC said it intended to return to the market today (September 28).
Meanwhile, Nationwide has introduced rate hikes to the tune of 1.2 per cent from today, taking first-time buyer rates to 5.69 per cent with a product fee, and 5.99 per cent without one.
ruby.hinchliffe@ft.com
