Stretched affordability continued to weigh on housing market activity in July and August, leaving mortgage applications for home purchase down by 40% from their high in January. A renewed rise in mortgage rates to above their previous peak of 6% in the first week of September will cause more pain for the housing market. Month-on-month house price growth ground to a halt in June and Fannie Mae’s National Housing Market Survey in August showed that households now expect a small fall in prices over the next 12 months. (See Chart 1.) This adds weight our view that price growth will drop to -5% y/y by mid-2023. Rental demand is slowing as surging rents and squeezed real incomes weigh on household formation. What’s more, a record number of apartments under construction means a wave of completions is set to push vacancy rates up next year. We therefore expect rental growth to cool rapidly from 17.5% y/y in Q2 to 8% y/y by end-2022 and 3.5% y/y by end-2023.
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