Rising interest rates
At the end of last year the Bank of England made an incremental increase to UK interest rates – increasing the base rate from 0.1 per cent to 0.25 per cent. Our latest forecasts for the period 2022-2026 anticipated rate rises over the course of the coming year, and as such, we have estimated price growth in the near term to be somewhat more muted than we have seen of late. But, with sales activity still running far higher than normal levels, even after the stamp duty holiday, combined with relatively low unemployment rates coming out of a recession, we can expect this to have a limited impact on household finances.
However, further gradual interest rate rises will cap how much new buyers can borrow relative to their income in a higher interest rate environment, particularly in higher-value markets where affordability is most constrained, acting as a drag on more long-term prospective price growth and market activity.
Changes to lending criteria
In December the Bank of England also announced that it will consult on getting rid of one of the key affordability hurdles imposed by lenders. Currently, stress testing rules mean borrowers must prove they can still afford their mortgage repayments if interest rates went up by 3 per cent. However, this could now be scrapped.
This could unlock access to mortgage finance for more people and will allow households to borrow more, at least in the short term, which could, in turn, increase the capacity for price growth further, although we wouldn’t expect it to be particularly dramatic.
Post-pandemic lifestyles and realities
The desire for space and lifestyle changes that have dominated the prime regional markets since the UK came out of lockdown more than 18 months ago, will continue to shape the housing market. While the appetite to relocate may ease slightly, evolving working practices will continue to underpin demand from those who can take advantage of greater flexibility and widen their previous search areas.
This trend could be further exacerbated by the emergence of different Covid-19 variants, such as Omicron, that may lead to more home working, not only in the short term but longer term too.
The road to zero carbon homes
This year we can expect the residential market to be pushed further down the road to zero carbon with enforcements expected for landlord regulation and lending targets. EPC targets for lenders, and changes to the cost and terms on which finance can be obtained, have the potential to change the equation for those with a mortgage, and could force many to make energy improvements to their homes.
Given the scale of the challenge there is huge opportunity for innovation, while pressure on private landlords and affordable housing providers opens up more opportunities for institutions.
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