Home sales and prices to cool as affordability worsens

Mortgage rates have risen faster than we originally anticipated and we now expect them to peak at 5.6% in mid-2023. That’s below the level of around 6% which we think risks tiggering a housing market correction, but higher interest rates mean we have cut our home sales and house price forecasts.  We now expect existing home sales to drop 12% in 2022, with pent-up demand from the last couple of years preventing a larger fall. More plentiful inventory means new home sales will see a smaller decline of 3% in 2022, but that will still weigh on single-family housing starts which will drop by 1% in 2022 and by 9% in 2023. House price growth has significant momentum coming into 2022, but with affordability at its worst since the mid-2000s we expect a rapid slowdown to 8% y/y by end-22, with no change in 2023. The rise in risk-free rates will also push up apartment yields this year. Coupled with a slowdown in rental growth that means we now expect total annual returns of 6.4% in 2022, down from 18.6% in 2021.