1. INTEREST RATES AND MORTGAGE REGULATION
The mini housing boom of the past 18 months has curbed the capacity for future price growth across large parts of the housing market, especially in an environment when interest rates are expected to gradually increase.
The scale and pace of anticipated interest rate rises are unlikely to put households’ finances under undue stress. This points to a soft landing in the mainstream market.
The extent to which increased rates act as a drag on the amount people are able to borrow – and therefore future house price growth – will depend on how existing mortgage regulation is applied and amended over the next five years. While the Bank of England has proposed relaxing current affordability stress tests for borrowers (which may provide a little upside on our outlook for house prices), this will be subject to consultation over the course of 2022. Furthermore, banks will still be bound by the requirement that no more than 15% of their lending can be at a loan to income ratio of 4.5 or more. This, together with our expectation the Bank of England takes a cautious approach to reform, caps prospects for further price growth.
This will put even more emphasis on the income returns for residential investors, tempering demand from mortgaged buy to-let landlords. The effect will be greatest in the markets of London and the South, where yields and future capital growth prospects are lower. The exception is prime central London, which continues to look good value – having missed out on the price growth seen in other markets primarily given the constraints on international travel.
For institutional investors, the impact of rising rates and the end of Help to Buy has the potential to increase tenant demand underpinning rental growth projections, even if current mortgage regulation is softened.