When we last revised our house price forecasts at the end of May, we noted the Bank of England was in the process of reviewing the mortgage affordability stress tests to which borrowers have been subjected to since 2014. At the time we noted that this relaxation would provide some additional medium term capacity for house price growth, but the extent of such additional growth would be:

• Dependent on the timing and nature of the reform; and
• Constrained by underlying limits on lending at high loan to income ratios and the ongoing need to adhere to Responsible Lending Rules.

The decision to do away with the most stringent form of mortgage affordability stress testing from the beginning of August has caused us to increase our forecast for UK house prices over the next five years from +12.9% to +17.4%. This is despite some of the headwinds currently faced by the UK economy. Loan to income ratios would be restored to levels seen at the end of 2021.

We have only changed our expectations for price growth from the end of 2023, on the basis that:

• The squeeze on household finances from both general inflation and increased costs of debt is likely to slow house price growth substantially over coming months, with the prospect of modest price falls next year, but:
• Prices will continue to be underpinned by the shortage of stock available on the market over the course of 2022, despite more caution from buyers.

We would also stress that the additional capacity for house price growth from 2024 onwards is predicated by an assumption that bank base rates return to 1.75% over the next 18 months, even if they are increased to a higher level in the short term.

Affordibility for the average household buying the average home

Sensitivity analysis

We have tested how sensitive affordability is to further increases in interest rates. 

If rates were to end 2026 at 2.25%, that would negate any increase in price growth capacity unlocked by changes to mortgage regulation.

Underlying mortgage affordability would be pushed up towards 2007 levels in the event that prices rose in line with our forecast and rates ended the forecast period at, say, 3.75%.

Underlying affordability would be stretched but not to the degree seen in the early 1990s when it was the primary cause of a house price correction.

The impact that this would have on the remaining affordability tests conducted by lenders would substantially eat into the capacity for five year house price growth.

From a regional perspective we believe more of the upside will be felt beyond London and the South East. This ref lects restricted capacity for loan to income ratios to be pushed towards the 4.5 x loan to income limit in the capital and its hinterland. No more than 15% of a mortgage provider's new lending can occur above this level.

Read our forecasts for the UK’s prime residential markets