The outlook for mortgages in 2023

Adapted from an article on FTAdviser.com by Robert Gardner who is chief economist at Nationwide.

It is not difficult to paint a pessimistic picture for UK housing market prospects in 2023, but there is still a good chance that a relatively soft landing can be achieved. Economic headwinds, already strong in 2022, are gathering pace. After stagnating over the past 12 months, it is widely expected that the UK economy will contract next year.

Household budgets are already under intense pressure as a result of income growth failing to keep pace with the rising cost of living and tighter financial conditions.  The main factor that would help achieve a relatively soft landing is if forced selling can be avoided.

There will not be much respite in 2023, with inflation set to remain well above the 2 per cent target (and above the average rate of wage growth), the bank rate being raised by another percentage point (if market pricing proves correct) and unemployment expected to rise as the economy shrinks. 

Momentum is also important in shaping housing market dynamics but, after retaining a surprising amount through the first nine months of 2022, activity came to a screeching halt in late September following a mortgage interest rate surge in the wake of the "mini" Budget.

Indeed, the number of mortgage applications fell towards the lows seen at the start of the pandemic, although this has yet to fully manifest itself in the Bank of England’s data on mortgage approvals. There has been little sign of a rebound as yet, even though financial market conditions have stabilised.  Then why isn’t a severe housing market slump the most likely outcome?

Wait and see

The current weakness in mortgage applications may, in part, represent an early seasonal slowdown.

With the chaotic backdrop and elevated mortgage rates prevailing in recent months, it would not be surprising if potential buyers have opted to wait until early January to see how mortgage rates evolve before deciding to step into the market. The affordability position for buyers is also likely to improve – albeit modestly.

Longer-term interest rates that underpin mortgage pricing are already below the levels prevailing before the fiscal statement and may moderate further, especially if market expectations for a peak bank rate of 4.5 per cent prove overly aggressive, as seems likely, given the headwinds facing the economy. 

If true, this will feed through to mortgage rates and help improve the affordability position for potential buyers, as will solid rates of nominal income growth (with wage growth currently running at about 7 per cent annual 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.

Most forecasters expect the unemployment rate to rise to around 5 per cent in the years ahead – a significant increase from the 3.7 per cent prevailing at the moment. However, this is still low by historic standards and close to the peak reached during the pandemic when house prices and activity surged.  The fact that the vast majority of the mortgage stock (about 85 per cent) is on fixed interest rates means most homeowners with a mortgage will be protected from higher mortgage rates, at least for a period. This will give them time to adjust, especially since nominal wage growth is rising at a healthy clip.

Clearly, those remortgaging in the near term will face a significant hit. For example, the typical borrower rolling off a five-year fixed rate product and taking out a new one will see their mortgage interest rate rise by about 350 basis points, which means an extra £300 a month on the average mortgage.  But it is also important to remember that affordability testing has been central to mortgage lending since the financial crisis and typically stress tested at an interest rate above those prevailing at the moment. This means that, while it will be difficult, the vast majority of those refinancing should be able to cope.

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

Robert Gardner believes that house prices are likely to see a modest decline in 2023, perhaps of around 5 per cent, a significant deterioration in the labour market or more elevated mortgage rates would probably be required to generate the double-digit declines suggested by some forecasters. While the risks are skewed in that direction, it does not seem like the most likely outcome.

Bristol, Bath and Exeter Mortgages Online cannot accurately predict any gains or losses regarding the property market but will keep up to date with expert opinions and predictions.

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