The UK housing market could face a severe storm with higher mortgage rates and lower house prices

The UK housing market could face a severe storm with higher mortgage rates and lower house prices

Written by Andy Bruce, Sinead Cruz and Caroline Con

LONDON (Reuters) – Rising borrowing costs and a potential slowdown in economic growth threaten to unleash a sell-off in Britain’s housing market, with consequences for personal wealth and the broader economy that could reverberate for decades.

The turbulent revelations of the country’s new economic strategy have left lenders scrambling to keep pace with wild swings in the sterling financing markets that determine the mortgage rates they give homeowners, whose sense of wealth is closely linked to the value of their property.

The latest government data showed that just under two-thirds of 24.7 million homes across Britain are owner-occupied, with 8.8 million fully owned homes and 6.8 million homes on mortgage or loan.

Some institutions have temporarily stopped selling mortgages to new clients, while others have ramped up repayment rates for new loans to levels seen straining millions of existing homeowners and making new mortgages unaffordable for many others.

Mortgage deals for new clients now feature rates between 5% and 6% – a sharp increase from the normal rate of around 2% over the past five years, which has led to growing concern of a crash in the property market afterwards.

โ€œThe mortgage crisis is going to be more than energy right now,โ€ said Richard Murphy, professor of accounting practice at the University of Sheffield, warning of falling home prices that could leave many with debts greater than the value of their homes.

This will end in tears.

Historically low interest rates since the 2007/08 global financial crisis and declining housing supply doubled the average British home price to ยฃ292,000 ($316,000) from just 154,000 in 2009.

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This fueled a feeling of affluence, which in turn boosted consumer spending and supported broader growth in the economy. But that could unravel if the unintended consequence of Finance Minister Kwasi Quarting’s attempt to force economic growth over economic growth with tax cuts increases the cost of borrowing.


A study by Fitch Ratings in July identified Britain as among the world’s most exposed to high borrowing costs due to the relatively high levels of debt-to-income accepted by homeowners and a high proportion of loans at floating rates.

Even among those who have fixed their repayment rate, 1.3 million borrowers are set to reach the end of their fixed rate period this year, according to an analysis by UK Finance and Accenture (NYSE: NYSE:) published before the latest rate hike.

The settlement of repayment rates finally depends on shifts in the debt markets as well as the total cost of borrowing set by the Bank of England – money markets now expect it to reach nearly 5.75% by the middle of next year from 2.25% now.

Referring to the rates, John Cronin, chief financial officer at stockbroker Goodbody, said, โ€œThe view of investors I have spoken to over the past day or so is that UK banks are actually saying there is no front book for these rates,โ€ referring to the rates. of services available to new clients.

“It’s very painful from an affordability standpoint.”

This comes on top of the cost-of-living crisis caused by rising food and energy prices that are already hurting so many.

Debt charity StepChange said one in seven of its new clients are mortgage holders facing rising debt, while Money Advice Trust said 5% of UK adults had already reported they were late on their mortgage payments last month – up from 2 % in March.

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“All of this is going to cause a massive downturn and massive disruption to the mortgage, housing and financial balance markets in a typical Briton,” Roger Jewolp, founder of the Campaign for Equitable Finance, told Reuters.

call calm

Besides the immediate pressure that will affect consumers’ ability to spend, higher borrowing costs also have the potential to send the multi-year home market recovery in reverse: HSBC analysts expect home prices to fall 7.5% next year.

Goodbody’s Cronin notes that in normal times, higher interest rates mean better earnings than lending, and thus has usually been positive for banking sector earnings – up to the point where there is a risk that the original loan cannot be repaid.

“At a certain level it will overshadow the rise in revenue,” Cronin said. “I think we’re now at that point where people are asking that question.”

Some major mortgage lenders are calling for calm, asserting that they are still signing mortgage deals and that the decline in lending among smaller competitors in no way indicates a broader exodus of lenders from the mortgage market.

Chris Huddleston, CEO of international brokerage FXD Capital, said he expects the mortgage market to remain in limbo in the coming weeks as investors monitor the currency markets and how the Bank of England reacts.

“If the pound stabilizes, and the BoE avoids an emergency rally – I don’t think that will happen – then lenders can resume lending with a certain degree of confidence in cost-of-money modeling,” he said.

(dollar = 0.9230 pounds)

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