Residential property prices look set to fall by at least 10% next year as increasing interest rates and a year-long recession trigger a slump in household spending, economists have forecast.

According to Credit Suisse, the rising cost of mortgages will squeeze households in 2023, as payments rise to the highest level since 2009.

Peter Foley, an economist at Credit Suisse, said: “We expect house prices to fall at least 10% next year in the US and UK.”

He added that a “global housing slump” will adversely affect growth in developed economies, including he the UK, in 2023.

There could be turmoil in the housing market if UK interest rates rise toward 5.5% by Spring as the markets are currently pricing, with most economists expecting house prices to fall – at least in the short-term.

Credit Suisse expects borrowers in the UK to be hit harder by rising interest rates than the US because the “overwhelming majority of US mortgages” are fixed for 30 years. Most UK borrowers fix their interest rates for between two- and five-years.

Mortgage interest payments as a share of disposable income are expected to rise from 7.3% to 9.6%, which would be the highest since the financial crisis.

In the bank’s annual outlook, Foley said: “The UK is more interest rate sensitive than the US, and households, already squeezed by energy costs, face a larger economic downturn.”

Credit Suisse also believes that the UK is already in recession. It expects the economy to contract by 1.3% in 2023 and only grow by 0.5% in 2024.

Around two million British borrowers have to remortgage between now and the end of 2023, representing a quarter of all outstanding mortgages. Credit Suisse said this will affect spending through a “negative wealth effect” as people generally feel poorer.

Credit Suisse does not expect the Bank of England to cut interest rates next year, despite the economic downturn. It warned that policymakers could quickly fall behind the curve on interest rates.

Sonali Punhani, the head of UK economics at Credit Suisse, commented: “Our view is that the Bank of England is underestimating the persistence and strength of domestic inflation and tightness of the labour market.”

While she said inflation had probably peaked at 11.1% in October, Credit Suisse believes price rises will remain above the Bank’s 2% target in 2023.

Punhani said: “There are risks that the Bank remains dovish and hikes rates by less than we expect, which could risk inflation being higher for longer, further sterling weakness, and eventually a more prolonged hiking cycle and higher terminal rates.”

Credit Suisse also noted that wage demands remained well above pre-pandemic trends, while the UK’s shrinking workforce problems could be “persistent” as labour market participation continues to fall.