The hit to UK homebuyer confidence from upheavals in the mortgage market is likely to drag on house prices during the second half of 2023 as the pool of available buyers shrinks with some homeowners deciding to sell, leading commentators tell Facilities Management Magazine.
According to Bloomberg Intelligence (BI’s) latest UK Housing Pulse analysis, the United Kingdom will experience a downturn in house prices, albeit one less marked than following the global financial crisis of 2008. Bloomberg also believes the downturn will predominantly effect smaller landlords as they grapply with surging loan repayments.
Iwona Hovenko, senior real estate analyst at Bloomberg Intelligence, says: “Soaring mortgage rates – as peak Bank of England rate views surged by 100 bps in just one month due to persistent inflation – pose a renewed threat to UK housing activity and prices. The shift risks undoing the fragile progress made earlier this year from the lows of Q4, suggesting the woes of UK homebuilders Persimmon, Barratt, Taylor Wimpey, Bellway and Berkeley may last longer than we previously anticipated.”
In May, the Halifax house-price index fell 1% annually – for the first time since 2012 – yet this was driven by a base effect, as prices were unchanged vs. April compared to an increase in May 2022. The Nationwide index was also static sequentially in May, despite the 3.4% annual price decline, owing to a stronger performance a year earlier. The Rightmove house price index was flat in June after reaching a peak in May.
A Month can be a Long Time in UK Housing
Elevated interest-rate expectations could hit the UK housing market even before the Bank of England hikes rates, given they drive the steep increase in mortgage rates that poses a material risk to housing activity and prices. Much higher-than-forecast inflation and wage growth reported in May and June have fuelled bets for peak rates of 5.75% vs. about 4.8% just a month ago. This has been followed by a similar dramatic spike in swap rates, which then pushed up mortgage rates. Yet with BOE rate expectations very volatile, once inflation starts easing, those views could potentially moderate quickly, offering the UK housing market a respite, though this may require several months of consistently falling inflation – while latest data have shown it remains sticky – implying risks for housing may be tilted to the downside.
While surging rates may add urgency for buyers who have already secured a more-attractive mortgage offer, other househunters may delay purchases until rates fall and housing-market headwinds ease.
Fragile UK Housing Recovery at Risk from Soaring Rates
Hovenko also says: “The recent sharp mortgage-rate hikes will hit UK housing sentiment, especially given the fragile rebound from post-mini-budget lows in Q4. While surging rates may add urgency for buyers who have already secured a more-attractive mortgage offer, other househunters may delay purchases until rates fall and housing-market headwinds ease. Soaring rates may create a spiral of panic among homeowners looking to remortgage before rates rise even more, which may fuel more hikes as lenders withdraw cheaper deals to curb applications. ”
BOE data for May doesn’t yet reflect the latest steep increases, though, anecdotally, price comparison websites flag the lowest five-year fixed rates on a 75% loan-to value (LTV) mortgage soaring by about 60 bps to 4.8% in a matter of days. Best-buy 60% LTV deals may have jumped even more to about 4.7%.
UK’s Mortgages Top £1.6 Trillion; Rates Could Exceed 5% in 2023
A revival in UK mortgage approvals appears set to slow or even plateau in H2 amid expectations of higher interest rates. The elimination of an affordability stress test – against a standard variable rate plus 3% – might only offer borrowers limited support. With mortgage rates poised to exceed 5% vs. above 6% in November for 75% loan to value, we expect the volume of monthly approvals to be about or below £20 billion vs. the £25 billion initially projected.
We believe significant softening is possible as the government lobbies banks for support for consumers most affected by the inflationary squeeze on income.
Tomasz Noetzel, banking analyst at Bloomberg Intelligence, adds: “Since 2021, several lenders (Halifax, HSBC) lifted the loan cap to 5.5x income. We believe significant softening is possible as the government lobbies banks for support for consumers most affected by the inflationary squeeze on income. Lenders may be more flexible with refinancing since mortgage holidays aren’t on the agenda.”
So what impact has a widely reported decrease in UK mortgage approvals had on the market? Noetzel points to an increase in remortgaging (which has become more likely on five-year fixed term mortgages), which he believes will, at least partly, offset any drop in first time-buyer volume as higher interest rates and a painful squeeze of households’ disposable income slowly alter banks’ mortgage-growth mix. He says: “April’s new-homebuyer mortgage approvals fell below £11 billion after recovering from January’s low level, and we don’t expect that trend to change significantly in the coming months, with some lenders pulling mortgage offers in response to rising interest-rate expectations.”
I think the UK property market is currently on a cliff edge and the upcoming interest rates announcement is set to further exacerbate the situation.
David Hannah, Chairman of property consultancy Cornerstone Group International, shares the view that government intervention is key to supporting homeowners struggling with their mortgage payments but urges more support.
He says: “Homeowners who are coming to the end of their fixed-rate deals will be looking at refinancing with rates that are more than double what they were a couple of years ago. If you’re finishing a deal with a rate of 1.5-2% and you’re going onto a rate above 5% that’s going to have a big impact on your budget. This means many homeowners will be unable to afford the extra interest and could even result in people losing their homes. This will also add further pressure to a rental market which has already registered record prices this year.
“I think the UK property market is currently on a cliff edge and the upcoming interest rates announcement is set to further exacerbate the situation.”
