The likelihood of a UK property crisis is increasing every day.

If fixed-rate mortgages soar above 7%, the economy may reach its breaking point.

All things considered, despite a persistent rise in borrowing costs that has caused five-year fixed rate mortgages to exceed 6%, the British housing market has thus far fared fairly well. According to the Nationwide Building Society, house prices are only down 3.5% from a year ago and marginally up in June. In May, mortgage approvals showed a little increase, according to the Bank of England.

Two variables account for the housing market’s durability. First, the population of Britain is increasing, with net migration reaching just over 600,000 last year, and the housing supply is finding it difficult to keep up. The second is that because most homeowners have fixed-rate mortgages, they have not yet felt the pinch of the Bank of England.

85% of mortgage payers, as noted by Nationwide, have fixed rates, but in the coming years, roughly 400,000 will need to refinance every quarter. According to Robert Gardner, the building society’s chief economist, “this equates to about 20% of the fixed rate mortgage stock refinancing by the end of 2023 and c. 40% by the end of 2024.”

As things stand, these borrowers will experience a significant increase in their monthly payments — by roughly £400 for someone looking for a new two-year term when their current fix expires. There are indications that many buyers are choosing variable-rate mortgages in the expectation that the Bank of England will release the brakes once inflation begins to decline.

This will happen someday, but it might take a while. The rise in core inflation, which excludes commodities like food and energy, has alarmed the Bank, and it is anticipated that it will announce the 14th consecutive increase in interest rates next month. According to the consensus in the City, the monetary policy committee will choose to raise interest rates another half-point, from 5% to 5.5%, and they won’t peak until they hit 6.25%. If this is the case, fixed-rate mortgages will rise above 7%. That might be the turning point when the housing market collapses and drags down the entire economy.

Clearly visible warning indicators are present. If interest rates remain at anyway near their current levels, there will be a dramatic decline in mortgage applications, which will lead to a decline in prices. House prices would decrease by 25% if mortgage rates remained at their current level for several years, according to Capital Economics’ Andrew Wishart, who believes that it is more likely that lower inflation will allow the Bank of England to start lowering rates in the middle of 2024. Even then, Wishart predicts that prices would drop by 12% from peak to trough, which is hardly likely to give homebuyers or renters—who are frequently disregarded but are also in dire financial straits—a pre-election feeling of optimism.

But the essential phrase is “so far”. Despite 13 consecutive hikes in interest rates from Threadneedle Street’s monetary policy committee, there hasn’t been a housing crash yet, but it doesn’t guarantee there won’t be one. The likelihood of a gentle landing is still present, but the dangers of a hard landing are increasing daily.

The percentage of a first-time homeowner with the average salary who purchases a typical property with a 20% down payment and makes monthly mortgage payments is one indicator of mortgage affordability. The long-term average is just below 30%, although it has since risen to nearly 40%. It has only been higher twice in the previous 40 years, in 1989 and 2007. Both times a housing crash ensued.