What’s bad news for the economy may be good news for house prices

Is the Office for Budget Responsibility too gloomy as far as mortgages are concerned? Hamish McRae asks

Falling house prices have a negative wealth effect, for even if people don’t have a mortgage, they will feel poorer and buy less stuff (iStock)

What’s bad news for the economy may turn out to be good news for borrowers – and for house prices. The story goes like this. Prospects for the UK economy next year are somewhere between poor and dreadful. The OECD thinks that the UK economy will suffer a worse downturn than other major economies, and a long recession is also predicted by the Office for Budget Responsibility (OBR).

Associated with these dismal forecasts are higher interest rates. When the Bank of England increased interest rates to 3 per cent earlier this month, there was a market expectation that the peak rate would be 4.5 per cent or even 5 per cent next year. That was in line with expectations for global rates, led by the US Federal Reserve.

The implications for mortgage rates here would be a peak of anything up to 7 per cent for a two-year fixed rate, a devastating level for people who have to roll over their mortgages in the next year or so.