The Hargreaves Lansdown business consultancy is forecasting a 10.4 per cent drop in house prices from their peak, to take place by the end of this year.

A new assessment of the market by the consultancy suggests that while mortgage interest rate rises may be causing short term damage to individual’s finances, the longer term effect of house price falls could be more damaging still.

Sarah Coles, senior personal finance analyst at HL, says: “We’re used to falling house prices affecting how we feel about money. Homeowners tend to feel less well off, so may cut their spending – particularly on home improvements and furnishings. 

“But property equity is also used as a last resort by some people to access lump sums when they remortgage. The inability to dip into growing equity will force them to make big changes to how they spend.”

Coles says a rarely-reported effect of house price falls is the impact it has on retirement plans for all kinds of property owner. Hargreaves Lansdown has conducted a sentiment survey to see how different potential house price falls would hurt the long term aspirations of different groups, such as home owners and private renters.

She continues: “Falling house prices have a profound impact on our long-term resilience … If house prices were to fall 18 per cent, later life resilience would drop seven times more for homeowners than for renters in the coming year. This owes much to the fact that in order to get a rounded picture of people’s retirement income and outgoings, [we] look at home ownership – and how much equity people have in their home, alongside pension savings and other assets. The idea is that the less equity you have when you get to retirement, the more you’ll need to pay to keep a roof over your head.”

Coles says rising house prices automatically build equity, because the mortgage becomes a smaller percentage of the value of the property. Conversely, falling house prices shrink the amount of equity you hold. 

And she warns that this is coming at a time when rising mortgage rates are adding an average of £250 to people’s monthly outgoings, which hits overall resilience too.