US house prices are likely to drop as rates rise, Capital Economics says

US house prices are likely to fall as mortgage rates exceeding 6 per cent crimp affordability for the average buyer, according to Capital Economics.

Property prices could contract an annual 5 per cent by the middle of next year, Matthew Pointon, senior property economist, said in a research note on Monday (Jun 20). He'd previously projected no change in values by that time.

An average household looking to buy a home for the median price will now have to put more than a quarter of their annual income toward mortgage payments, according to the report. That surpasses the average 24 per cent seen in the mid-2000s.

"That deterioration in affordability will shut many potential buyers out of the market," Pointon wrote. "That will reduce the competition for homes, and sellers will eventually see the need to accept a lower price for their property."

The Federal Reserve's actions to get inflation under control has squeezed US housing market activity, though prices have so far stood firm. Capital Economics expects property values to rebound to a 3 per cent annual gain by the end of 2024. BLOOMBERG