Rising mortgage rates have yet to hit the housing market but threaten to be a “significant drag” in the short-term, Nationwide has said.
However, the high street lender said “a relatively soft landing is still possible” against a backdrop of income growth and modest falls in property prices.
The building society also said while typical homeowners coming off fixed rate mortgage deals face significant increases in their monthly payments, it points out those borrowers had been “stress tested” for higher rates and so should be able to cope.
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As such the market was unlikely to see “waves of forced selling”, providing the labour market and interest rates followed expectations.
The assessment came after fixed-rate mortgage deals recently broke through the 6% mark following on from the Bank of England increasing the the base rate from 4.5% to 5% in a bid to cool inflation, which remains stubbornly high at 8.7%.
Nationwide’s data indicated house prices fell by 3.5% in the year to June, following a 3.4% drop the previous month.
Prices were fairly stable over the month, rising by a modest 0.1%, reversing a 0.1% month-on-month decline in May.
The average UK house price in June was £262,239.
Robert Gardner, Nationwide’s chief economist, said: “Longer term borrowing costs have risen to levels similar to those prevailing in the wake of the mini-budget last year, but this has yet to have the same negative impact on sentiment.
“For example, the number of mortgage applications has not yet declined and indicators of consumer confidence have continued to improve, though they remain below long run averages.
“The sharp increase in borrowing costs is likely to exert a significant drag on housing market activity in the near term.”
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But he added: “Nevertheless, a relatively soft landing is still possible, providing the broader economy performs as we (and most other forecasters) expect.
“Labour market conditions are expected to remain relatively robust, with the unemployment rate remaining below 5%, while income growth is projected to remain solid. With Bank rate likely to peak in the quarters ahead, longer term interest rates should also start to fall back.
“As a result, a combination of healthy rates of income growth and modest price declines should improve affordability over time, especially if mortgage rates moderate.”
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Mr Gardner pointed out that for people coming off two-year fixed-rate mortgage, a new two-year deal could equate to an increase of £385 per month for a typical borrower.
Those coming off five-year deals face an increase of around £315 per month.
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He said: “Clearly this represents a significant increase, but those borrowers were stress tested at interest rates above those now prevailing in the market to ensure they could cope with such an increase.
“Moreover, incomes have been rising at a solid pace in recent years. Lenders will also work with borrowers to provide assistance wherever possible.
“Therefore, providing the labour market and interest rates perform broadly as expected, we are unlikely to see the waves of forced selling which would probably be required to result in a more disorderly adjustment to the housing market.”
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Managing director of House Buyer Bureau, Chris Hodgkinson, said: “For those looking to sell, current market conditions are a tad hit and miss. We’ve seen fluctuating levels of buyer demand in recent months and, with house prices continuing to stutter due to a reduction in buyer purchasing power, many sellers are also unwilling to commit.
“The result is more time spent on the market, while those that do secure a buyer are subject to longer transaction times and a heightened chance that their sale will fail to make the finish line.”