Cheaper mortgage rates will help soft landing for housing market

Cheaper mortgage rates will help the housing market achieve a soft landing in 2023 and avoiding forced sales will bolster its prospects further, Nationwide says.

Annual house price growth continued to slow sharply as 2022 drew to a close with data from the building society reporting a fourth consecutive monthly fall in house price growth.

As ever, some regions performed better than others – East Anglia leading the fray last month while Scotland was the weakest.

Longer-term interest rates have returned towards the levels prevailing before the mini-Budget.”

Robert Gardner (pictured), Nationwide’s Chief Economist, says: “With the chaotic backdrop and elevated mortgage rates in recent months, it wouldn’t be surprising if potential buyers have opted to wait until the New Year to see how mortgage rates evolve before deciding to step into the market.

“Longer-term interest rates, which underpin mortgage pricing, have returned towards the levels prevailing before the mini-Budget.

“If sustained, this should feed through to mortgage rates and help improve the affordability position for potential buyers, as will solid rates of income growth (with wage growth currently running at a c.7% pace in the private sector), especially if combined with weak or negative house price growth.

“But the main factor that would help achieve a relatively soft landing (especially for house prices) is if forced selling can be avoided, and there are good reasons to be optimistic on that front.”

UNEMPLOYMENT

Most forecasters expect the unemployment rate to rise towards 5% in the years ahead – but by historic standards that is still low.

Gardner adds: “Household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85% of mortgage balances on fixed interest rates.

“The fact that the housing market remained buoyant in the first three quarters of 2022, despite weak consumer confidence on the back of a stagnant economy, falling real incomes and a near tripling of mortgage rates, provides some reassurance that there will be a pickup in activity in the New Year, although it is likely to remain tepid until the broader economic outlook improves.”

Mark Harris, Chief Executive of mortgage broker SPF Private Clients, says: “Lenders continue to chip away at the pricing of their fixed-rate mortgages but even so, there are still many people coming off fixes who are in for a payment shock. We expect lenders to come to market with more attractive pricing as they start from scratch in terms of building their business for the new year.”

Jeremy Leaf, north London estate agent and a former RICS Residential Chairman, says: “The housing market continues to be supported by strong employment, lack of stock and lender forbearance, which are reducing the risk of mortgage defaults and preventing a larger fall in house prices.”

Tomer Aboody, Director of property lender MT Finance, says: “A combination of Covid, the Ukraine war and changes in government, have left the UK in a position where stability is key to growth and confidence. We have probably seen the peak in Swap rates which will help, and are now waiting for more continuous and steady market rates.”

Meanwhile Lawrence Bowles, Director of Research at Savills, adds: “We’re expecting to see slower housing market activity in the mainstream markets over the next twelve months. Activity is expected to remain strongest in those parts of the market least reliant on mortgage debt: specifically in equity and cash rich prime markets, where demand is driven more by flows of equity than by changes to mortgage rates.

“Savills has forecast that the average UK house price will fall by -10% in 2023, with growth expected resume in 2024 as affordability pressures gradually ease (net +6% over 5 years). But prices will start rising again in 2024 as we see interest rates start to fall. By contrast, we expect Prime Central London values to contract by just -2% in 2023, and to rise by 13.5% between now and the end of 2027.”

Tom Bill, head of UK residential research at Knight Frank, agrees with the house price forecast and says that the steep monthly house price declines that followed the mini-Budget have reduced as mortgage market volatility calms down.

But he warns: “Borrowing costs have become more expensive as well as more stable, which will keep downwards pressure on prices. Despite the fact mortgage rates should keep edging down, when the spring selling season gets underway in 2023, a fixed-rate mortgage is likely to be more than 2.5 percentage points higher than this spring, meaning many movers will have to reassess their options.”