We understand how important it is for our customers to stay informed, especially when it comes to decisions surrounding their mortgages and properties. We spoke to Michael, Managing Director of Key Solutions Mortgages about his predictions for the 2023 housing market, rental challenges and how interest rates will affect borrowing.
This is a longer read than we usually put out, so if you’d like a quick summary please see our key highlights.
2023 will very likely preside over a much-changed property market, especially when compared to the 2022 market.
The first 9 months of 2022 saw strong levels of transactions in the Purchase and Remortgage sectors, despite many factors that probably should have cooled it sooner. When the change of pace finally came (triggered by the Government’s mini-budget in September ‘22) it was a sharper and more extreme fall than the industry was expecting, or ready for.
Factors preventing a faster recovery from this sharp fall (and are likely going to continue to do so through 2023) seem to be a ‘perfect storm’ for making life difficult for both existing mortgage owners, and those seeking to borrow in 2023. But what are these factors?
The UK’s inflation figure hit 11.1% in October 2022 (the highest since 1981), before dropping to 10.7% in November (closer to the Eurozone average of 10.1%) and then down again to 10.5% in December (still much higher than the Eurozone average of the time)
Data source: Bank of England
Both the Bank of England and Office for Budgetary Responsibility forecast that the October figure represents the peak, and inflation will continue to fall through 2023, with an end-of-year figure likely closer to 4%.
What does this mean?
This is good news for potential borrowers, as most lenders use the Office for National Statistics cost of living figures (alongside income) to determine how much borrowing they will allow. So any reductions in cost of living costs will make it easier for borrowers to raise the capital they need.
Any easing in inflationary pressures also reduces the need for the UK’s central bank, the Bank of England, to consider additional base rate increases.
So if inflation continues to ease, we are unlikely to see continued increases in the base rate.
But for the first 6-9 months of this year, inflation will remain well above the Bank of England’s target of 2%, and high inflation will continue to squeeze affordability for borrowers. For some it will make little to no difference, but those on lower incomes or with smaller deposits, it may be the difference between success and failure for their mortgage application.
2. Interest rates
The Bank of England steadily increased the base rate over the last 14 months – 9 times between December 2021 and December 2022 from its record low of 0.1% to its current rate of 3.5% – in an attempt to reduce inflation to below it’s 2% target.
Date source: statista.com
The prevailing opinion in the market is that we are unlikely to see many more rises in the base rate in 2023.
This, combined with steady (but not spectacular) decreases in mortgage swap rates (the lead indicator for the cost of fixed mortgages) point towards a more stable market in 2023, but not a return to the very low-cost borrowing we’ve seen in recent years.
The current cost of fixed rate borrowing is not high, when looking at previous years.
In December 2022, the cost of a fixed-rate mortgage was nearly identical to the equivalent loan in 2012, and as of today, is in fact lower. It just feels like a shock to consumers, simply because it rose so fast.
2022 started with the average two-year fixed borrowing rate at just 1.95%, and just eleven short months later it had hit a whopping 6.25%. These higher rates triggered a wide-spread ‘wait and see’ mentality in homebuyers (both first-time buyers and movers) as they quickly became reluctant to lock into mortgages that might suddenly look uncompetitive when the world got ‘back to normal’.
It’s likely that the cost of borrowing has not only stabilised, but will go on to reduce further throughout 2023. But it’s extremely unlikely that the cost of borrowing will return to 2021/22 rates. Purchase traffic will slowly recover as the public gradually (and begrudgingly) accept the new ‘normal’ cost of debt.
3. House prices
House prices are predicted to fall throughout 2023, generally between 5-8% from the record highs of 2022 depending on which expert you listen to. There are much higher predictions out there, including those at well over 10%.
Data source: ONS and Gov.org
These seem overly pessimistic as we would need to see either:
- Significantly worse unemployment
- Significantly worse economic conditions
- Markedly higher mortgage costs than those actually being forecast
for house prices to fall higher than 10%.
Declining house values can be both good and bad news for the property market.
Falling prices bring the prospect of property ownership closer to the reach of first-time buyers, especially with salary growth in a robust place right now.
On the downside, falling property values will make many homeowners reluctant to sell, as they may believe they should wait for prices to recover before going to market.
This can trigger a greater interest in retaining properties and renting them out to fund their ongoing purchase, which the industry refers to as a let to buy, and the regulator refers to as ‘accidental landlords’. We’ve already seen an increase in interest in this as a potential solution, and will likely gather pace over 2023. This, in turn, has generated a sharp decrease in the success rates of these applications. The higher costs of buy-to-let mortgages has meant that fewer applications are able to clear the affordability bar required by lenders.
4. Rental market
The rental market will continue to be challenging, with rent costs predicted to rise by at least 12% in 2023, further hitting the budgets of private tenants.
This is largely being fuelled by relatively high demand and low supply. By Q3 of 2022 there were 26% fewer rental properties than the pre-pandemic average, meaning that more than a quarter of the rentable stock had been taken off the market.
This is a problem in any market but towards the end of 2022 it was compounded by rising mortgage interest rates and low customer confidence, meaning that rents were rising at the same time that the only alternative was fast losing its appeal.
Much of this recently-disappeared rental stock will have been lost back to the residential market as decreasing but-to-let tax breaks progressively made the landlord market less and less profitable. Some of it was also lost to the boom in holiday lets through services like Airbnb as the popularity of UK ‘staycations’ rose sharply during global lockdown conditions.
On the positive side, much of this housing stock will be very suitable for prospective first-time buyers, which will help to ease the loss of the government-sponsored Help to Buy scheme. This is another positive change in the property demographic that’s likely to support the overall recovery in 2023
Much of the doom and gloom in the press about mortgage-holders not being able to afford their loans when they come up for review is unwarranted.
The media has greatly exaggerated the factors we’ve outlined in this article ‘joining forces’ to trigger biblical-levels of mortgage arrears and property repossessions. It’s true that they were taken out at lower interest rates and it’s true that many borrowers have seen unwanted rises in their mortgages. However, what’s overlooked here is that all lenders were required to stress-test the original borrowing at rates much higher than those offered to customers, meaning that the vast majority were declared ‘safe’ up to rates higher than those currently available.
This should shield most borrowers from serious financial difficulty when their mortgages need to be re-fixed as the inbuilt ‘wiggle-room’ means that their budgets should be resilient to some degree of financial shock. However, with the combination of higher mortgage costs, elevated inflation, and the UK reaching record levels of unsecured personal debt, it is reasonable to assume that property repossessions and forced selling will rise to some degree over the remainder of the year.
6. Market Recovery
The mortgage market is a complex machine with a great deal of moving parts; as a result it’s difficult to predict the path it might take because the influencing factors are so numerous and diverse.
That said, some aspects of it are very nearly universally true. Firstly, when the market cools it generally does so pretty quickly. It’s not akin to a switch being flicked, and there are usually warnings, but it’s nevertheless disconcertingly rapid.
Last year, we predicted a cooling in Q4 but the rate at which it occurred was still a surprise. Second probable-truth is that when the market warms back up again, it does so much more slowly than it cooled, so the inevitable 2023 recovery will be far from an overnight event.
However slowly, the market will recover to some degree over 2023, (helped by the ease in affordability, slight reductions in the cost of borrowing and returning consumer and market confidence) but it is unlikely to reach the fever pitch achieved over the first nine months of last year. That’s not necessarily a bad thing, as we saw service standards in the lender and conveyancing sectors drop last year, often ending up costing consumers money.
Purchase business will increase as a percentage of overall traffic as prospective buyers adjust to the new ‘normal’ of higher borrowing costs. We’re likely to see some reluctance in the ‘second-move’ market, as homeowners are handed valuations that are disappointing in comparison to the values that were achievable last year. This will drive a percentage of the market to hold on to their homes in the hope the market recovers and a smaller percentage will attempt the let-to-buy route.
The main economic indicators that underpin the cost of borrowing are already below the rates before the ‘mini-budget’ announced on 23rd September, meaning that the loss-of-market-confidence it triggered has recovered, and lenders can see much more resilience in the two- and five-year fixed-rate markets.
Ultimately, the market will recover. It was buoyant in the first three quarters of last year despite varying degrees of the factors described in this article, so it can recover ground this year with varying degrees of the same factors hanging around in 2023.