London CNN Business  — 

House prices in the United Kingdom could plummet by as much as 15% if the country presses ahead with its tax-slashing economic gamble.

Credit Suisse (AMJL) said on Tuesday that UK house prices could “easily” fall between 10% and 15% over the next 18 months if the Bank of England aggressively hikes interest rates to keep inflation in check.

“Once all the rate rises feed through, mortgage debt affordability deteriorates to the same level as the pre [global financial crisis] peak,” Credit Suisse research analysts wrote.

UK finance minister Kwasi Kwarteng last week announced the biggest set of tax cuts in 50 years and a massive increase in government borrowing. The news sent the value of the pound plunging to a record low against the US dollar and UK government bond prices crashing.

Some analysts now expect the Bank of England to raise interest rates to 6% next year, up from its current 2.25%, to prop up the ailing currency. The central bank announced emergency bond buying on Wednesday to try to restore market calm.

The fallout could make it harder for people to get approved for mortgages, and encourage prospective buyers to delay their purchases. A drop in demand would lead to falling prices.

Since Friday, several lenders have withdrawn hundreds of mortgage products in response to the turmoil.

Capital Economics, which likewise forecasts a drop in house prices of between 10% and 15%, warned the slump could be “devastating.”

“The resulting drop in buying power makes a significant drop in house prices inevitable,” Andrew Wishart, senior economist at Capital Economics, said in a research note on Tuesday.

Wishart said that a 6% interest rate would reduce the maximum mortgage a typical first-time buyer with an annual income of £55,000 ($59,000) could secure by 26% to £203,000 ($217,000).

“A surge in UK home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023,” Richard Donnell, executive director at Zoopla, a real estate provider, told CNN Business on Wednesday.

That’s a wider problem for the economy given that 36% of household wealth is held in property, data from the Office for National Statistics shows.

Risk of defaults

Millions of mortgage borrowers are steeling themselves for a nasty hike to their monthly payments as a result of higher-than-expected interest rates, which were already forecast to rise over the coming months.

At a 6% base rate, a person refinancing a 20-year fixed-rate mortgage of £146,000 ($157,000) — the average outstanding balance on a residential mortgage in the UK — can expect to pay an extra £309 ($333) per month, Laura Suter, head of personal finance at AJ Bell, told CNN Business on Tuesday.

That’s £108 ($116) more than the investment firm estimated before this week’s market crash.

About 1.8 million people are due to refinance next year, according to the Resolution Foundation.

Samuel Tombs, chief economist at Pantheon Macroeconomics, said in a Tuesday report that sharp increases to monthly payments could spark a wave of mortgage defaults, with consequences for the country’s banking sector.

“Mortgage arrears and default would rise just as house prices likely would be tumbling, placing huge strain on banks’ balance sheets,” Tombs said.