This dark economic cloud does have a silver lining

What’s bad news for the economy may turn out to be good news for borrowers and for house prices.

- HAMISH MCRAE

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. There have been a correspondingly gloomy set of forecasts for house prices, with Lloyds predicting an 8 per cent decline as its mid-point estimate for the market as a whole, which inevitably means that some areas will do worse than others.

Pull the forecasts for interest rates and for house prices together, and there would be a triple blow to consumer demand. Higher mortgage costs cut household spending on other things. 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. And falling numbers of transactions mean fewer people moving home and hence less demand for washing machines, fridges and all the other stuff people have to buy when they move.