Mortgage Mayhem Sparks Fears Of A Housing Market Crash In Britain

• There are growing fears of a housing market crash in the U.K., after a swathe of tax cuts announced by the government sent interest rate expectations soaring, driving up lending rates for homebuyers.
• Finance Minister Kwasi Kwarteng’s so-called mini-budget on Sept. 23 spooked markets with £45Bn ($50.5Bn) of debt-funded tax cuts, triggering a massive spike in government bond yields. These are used by mortgage providers to price fixed-rate mortgages.
• The Bank of England responded to the market mayhem with a temporary purchase program of long-dated bonds, which brought some fragile stability to the market. However, Oxford Economics Chief U.K. Economist Andrew Goodwin suggested that there could be more pain ahead — particularly when it comes to the housing market.
• Oxford Economics estimates that if interest rates remain at the levels currently being offered, house prices are approximately “30% overvalued based on the affordability of mortgage payments.”
• A number of banks suspended mortgage deals for new customers, and many have now returned to the market with significantly higher rates.
• Looking ahead, whether the fixed rates on mortgages remain elevated or begin to moderate will depend on the trajectory of interest rate expectations. These have come off previous highs of over 6% after the government U-turned on its plan to scrap the top rate of income tax, but analysts do not expect this to quell the market’s skittishness.

(Source: CNBC)