UK mortgage lending to be lowest in over a decade in 2023, EY says

Published Thu, Oct 27, 2022 · 09:27 AM

UK mortgage lending is headed for its biggest plunge in more than a decade next year after a surge in interest rates and cost-of-lending squeeze brings household budgets to a breaking point.

Total loans for house purchases may total just £11 billion (S$18 billion) next year, a fraction of the £63 billion expected for 2022, according to a report from the consultant EY. That would mark 0.7 per cent growth in lending, the lowest since 2011 and down from a healthy 4 per cent increase expected this year.

The report is the latest warning sign flashing for the Britain’s housing market, which kept growing through the pandemic even as the economy tipped into recession. With another downturn underway, lenders and estate agents have for months predicted that the property market is likely to slow if not plunge in the months ahead.

Borrowing costs are soaring along with expectations that the Bank of England will keep raising interest rates in response to the highest inflation in 40 years. Investors are betting on the biggest increase in 33 years when policymakers meet again next week, taking the base rate to 3 per cent from near zero at the end of last year.

“While interest rates are still fairly low by historic standards, they are the highest they’ve been in a decade and are set to rise further,” said Anna Anthony, UK financial services managing partner at EY. “This will put further pressure on already-strained finances and will have a knock-on effect on demand for most forms of bank lending.”

The cost of key UK mortgages remains close to a peak last seen in the 2008 financial crisis, which is reducing the number of people who can afford to buy property. It’s also raising the costs for borrowers who need to refinance loans, which in the UK market typically happens at least every five years.

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Analysts at Credit Suisse say that house prices “could easily fall 10 per cent to 15”, and others including Niraj Shah of Bloomberg Economics predict double-digit declines. HSBC is predicting falls of 7.5 per cent nationally and 15 per cent in London.

That will reverse some of the gains made since the start of the pandemic, a period that has seen house prices soar 23 per cent. The factors that boosted the market then – a strong labour market and shortages of homes for sale - may continue to provide some support, the mortgage lender Halifax said on Oct 7.

The political turmoil that culminated with former prime minister Liz Truss handing power to Rishi Sunak also is weighing on the market. In recent weeks, Truss’s plans for unfunded tax cuts spooked investors, pushing up interest rates in financial markets. While those rates have come down sharply with a U-Turn on the budget measures, mortgage rates have yet to return to the levels prevailing in the summer.

For now, the housing market remains healthy, with asking prices for properties coming to market rising in September at the strongest pace in months, according to real estate search website Rightmove. But its report also showed buyer demand has fallen 15 per cent in the first two weeks of October.

Separately, Barclays is among a handful of lenders predicting that UK house prices will continue to grow despite ongoing turbulence in the property market.

The British bank said on Wednesday (Oct 26) that while higher interest rates are expected to adversely impact housing markets in major economies, house price growth should remain “positive over the forecast horizon”.

That’s after HSBC Holdings said on Tuesday that its central scenario was for UK house prices to keep rising over the next two years.

The chief financial officer of Banco Santander, which has a significant UK presence, also told Bloomberg TV on Wednesday that he does not expect to see significant UK house price drops in the coming years. “Provided the labour market remains strong, we believe that house prices will hold relatively well,” Jose Garcia Cantera said.

Other lenders are more bearish. Figures released by Halifax on Oct 7 showed UK house prices fell 0.1 per cent in September, with the lender predicting a sustained slowdown in prices amid soaring inflation and mortgage rates that are hovering near 14-year highs.  

Still, a recent drop in UK government bonds will ease the cost of loan funding for banks. The yield on 30-year gilts has dropped back to levels seen before the mini-budget, though the effects will take several days to filter through into the cost of mortgages. BLOOMBERG

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