UK residential housing – market dynamics and fragility analysis

Could UK mortgage rates drop below 6%?

The specialist said the recent rise in mortgage rates will be most immediately felt in the transaction market. A combination of buyers no longer able to borrow enough under current mortgage rates and sellers no longer able to reach their price expectations could create a “stand-off” that causes a low number of transactions. House valuations could then be at risk from “forced sellers”, further reducing prices, the specialist said. 

We were told that Help-to-Buy equity loan buyers, particularly in London, could be at most risk to changing house prices. The specialist is also concerned about the buy-to-let sector, particularly landlords dependent on lower-income households. Rent prices have already reached “double-digit” growth, which could force some renters to move in with their parents, house share or live further outside city centres.

We heard that borrowers with fixed-rate mortgages ending  soon – which our specialist predicts could be 370,000 borrowers by Q2 2023 – could be at “real risk” of not being able to refinance their mortgages at current rates. They also said well-established lenders that rely on deposit-based funding should return products to the market “if things settle”, which could start to bring mortgage rates down. However, “fringe” lenders that are more willing to take risks with certain buyers may struggle to return products to the market. 

The credit crunch following the pandemic was noted by the specialist as a “warning” for loan-to-value (LTV) ratios, which are “narrow”. They said if stability returned to the market and house prices crashed, then it could become “more expensive” to borrow at 90%-plus LTV because of the risk of negative equity. 

While mortgage rates might not stay high, the specialist said it is likely the UK housing sector could see a short-term fall in activity due to affordability pressures. The longer mortgage rates remain above 5%, they added, the more likely mortgage lending “dries up” – potentially causing house prices to drop by 25-35% over the next 12-18 months. 

But what “scares” the specialist is the current political environment, which they believe has “accelerated” the UK housing market onto a risky trajectory with few options to reverse course. They warned that the UK government’s ability to reverse course is “much more constrained” than before the mini budget in late September and they contemplated whether “the highest levels of government” recognise the severity of the current situation. 

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