As things stand, and until we have clearer picture of how the Bank of England and lenders will react to recent events, it is difficult to predict precisely what the future holds for the mainstream housing market. As a minimum that indicates a hiatus in the market over the immediate term.

Thereafter, a lot depends on the impact on the cost and availability of mortgage debt over the medium term and the extent to which policymakers and lenders seek to mitigate the potential impact of a sharp increase in interest rates.

From a new buyer’s perspective, significant increases in interest rates will limit the level of debt they are prepared to take on or able to secure from their lender. So in the immediate future, we would expect a lot of potential buyers – particularly those reliant on high loan to value borrowing – to sit on their hands, especially given the general levels of uncertainty in the mortgage markets.

Looking a bit further out, some will press on with a reduced budget but others will step out of the market until rates return to a more accessible level. As a consequence we expect to see a period of lower transaction levels, much as we have seen during other periods of uncertainty in the housing market.

It is also clear that if interest rates hit the levels currently being priced in by the money markets and to a lesser degree economists, considerable financial strain would be put on existing borrowers who are coming to the end of a fixed rate deal or who are already on a variable rate. Those able to do so are likely to dip into their savings, while others will seek financial support from family members to tide them over.

Banks and building societies will have little choice but to pass any bank base rate increases on to their customers, but they will be keen to avoid a big rise in repossessions. For this reason the forbearance of lenders will be a critical factor in how the market reacts. 

We would expect to see lenders take lessons from the pandemic and look at options to reduce the financial pressures on their customers. Though this is unlikely to mean full-scale mortgage holidays, delaying capital repayments might be something they consider as an example.

Equally, the Government, which has been keen to support homeownership, will be all too aware of the effect the fortunes of the housing market has on consumer confidence. If its intervention in the energy markets is anything to go by, we might expect it to implement time-limited measures to support homeowners during a period of elevated interest rates, which again would mitigate the impact on the market.

Overall there is little doubt that we will see be a combination of downward pressure on prices and lower transaction levels during 2023. However, as things stand, it is difficult to be confident of the trade-off between the two.

We also expect different parts of the market to be affected to a different degree. First-time buyers and buy-to-let landlords, who are most reliant on mortgage debt, are likely to be the most affected. Across the rest of the market, more affluent buyers with lower debt requirements will be better able to ride things out.

Over the longer term, prospects for the market will be dependent on how long it takes for inflation to be tamed and for the interest rate environment to normalise.
 

Further information

Contact Lucian Cook