Credit ratings agency Moody's has issued a warning that house prices in Britain could experience a 10% decline over the next two years. According to Moody's Investor Service, a more severe

downturn in the housing market could even lead to a prolonged recession.

The report from Moody's states that "Persistently high inflation and the recent spike in lending rates will trigger a correction in the UK (Aa3 negative) housing market." Last month, unexpected strong inflation data in the UK resulted in a significant increase in market interest rates as investors hurried to factor in anticipated borrowing cost hikes by the Bank of England in the coming months.

As a result, mortgage lenders have responded by offering interest rates that are now significantly higher than a year ago, with two-year deals exceeding 5% compared to rates below 3% in the past.

Moody's suggests that if house prices were to decline further, by approximately 21%, it would have far-reaching implications for the overall economy. The report highlights that "The UK sovereign would enter a recession in the second half of 2023, lasting for six quarters. Unemployment would reach 6% by the end of 2024, still below its peak during the global financial crisis."

Although the housing market experienced a slight recovery earlier this year after weakening at the end of 2022, following an increase in mortgage rates prompted by former Prime Minister Liz Truss's economic policies, many economists anticipate a decline in house prices this year as the Bank of England's borrowing cost hikes translate into higher mortgage expenses.

Recent house price indexes published by competing lenders Halifax and Nationwide have both shown year-on-year declines for the first time since 2012. In a Reuters poll of economists and property analysts released last week, it was predicted that house prices are likely to fall by 3% this year before stabilizing in 2024.