The housing market can only defy gravity for so long

However, if, as Capital Economics predicts, interest rates hit 3pc and banks start to pull in their horns by passing through the cost of mortgage borrowers, the cost of servicing the same mortgage on the same house will likely eat up over half of a standard household’s disposable income. If interest rates hit 4pc, we’re in for a world of pain.

And remember: every month that inflation outpaces earnings growth, disposable incomes will be eroded a little in real terms. The Bank of England is forecasting that real disposable incomes will fall by 3.25pc this year, the biggest drop since records began in 1990, before sliding again in the following 12 months.

Capital Economics has said it thinks house prices could drop by 5pc over the course of 2023 and 2024. It has detected signs the market may already be turning, with Google data that showed that visits to property websites had dropped back to their lowest level since May 2020. Data out last week showed month-on-month house price growth slowed to 0.3pc compared to 1.1pc in March – a much faster deceleration than economists had predicted.

Rising interest rates will, of course, hit borrowers on variable rates first. Thankfully, there aren’t that many of them in the UK. However, next in line will be those on short-term fixed deals. And there are lots of these borrowers – indeed, nearly half of the fixed-rate stock is for no more than two years. Some 1.5 million fixed-rate mortgage deals are due to expire this year and a similar number next year, according to data from trade association UK Finance.

So, UK house prices can probably weather a year or two of higher interest rates; persistent demand for homes will likely prevent a crash. But if rates rise above 3pc and are still high beyond the end of next year, homeowners are going to face an almighty squeeze – just in time for the next general election.

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