Five ways to win in 2023’s housing market – Rance

Now that the dust has settled on the mini Budget crisis, hard truths are visible through the political drama and market chaos. When we wake up in January 2023, there will be continuing high inflation, increased interest rates and declining house prices – it’s just a question of to what extent and for how long.  So, now the environment has become clear, how should mortgage businesses react and plan?  

Inflation 

At the root of the current turmoil is price inflation, not seen in most of our working lives. October’s official 11.1 per cent rate is the highest for 40 years – I was still at primary school.  

As consumers and businesses, we are seeing things we have not experienced in our lifetimes including widespread strikes and shocking price increases. Lower income households have been at the sharp end of this for many months now, but as savings are eroded and disposable income declines, the pain will be felt more widely amongst homeowners in 2023. 

Interest rates 

Interest rates must rise to tackle inflation, and central banks are tightening policy accordingly. This is where things bite for mortgage lenders, brokers and borrowers. Hopefully, after the recent rapid increases and market turbulence, the base rate is reaching its peak, and shouldn’t rise above four per cent.  

If so, fixed mortgage rates may even start to come down in the new year, as lenders price to win business, rather than protect their balance sheets. However, rates will be dramatically higher than a year ago and as renewals come around, borrowers will have to adapt to repayments which are way beyond their original budgets. Some will not be able to cope and will be forced to sell. Others will have to tighten their belts painfully.  

The scramble to re-price following the mini Budget was just the start. The mass consumer impact will come in 2023 as 1.8 million fixed rates come up for renewal. Brokers have the opportunity to be heroes here, but lenders may be tempted to offer retention deals to existing customers.  

House prices 

Increased interest rates, combined with inflation, mean consumers can borrow less, and that means house prices will inevitably decline over the next 12 months. In the immediate aftermath of the mini Budget, the fear was that this could be as bad as previous market crashes – up to a 20 per cent fall.  

Now most economists and forecasters are predicting a more modest correction of five to 10 per cent. Some of this has started to come through with Nationwide reporting a 1.4 per cent drop in November but the real impact is yet to come. However, modest house price decline is best viewed as a reasonable correction to the post-Covid boom. It should be within the stress tests for most mortgage lenders and borrowers.  

So hopefully no catastrophe, but the effect of reducing prices is a dampening on transaction volumes, as speculation and aspiration drains out of the market. The market will be driven more by ongoing lifestyle changes – marriage, divorce, children, jobs. Again, brokers have a hero role to play here – helping borrowers to find the best solutions for their changing financial and lifestyle needs.  

New homes 

A regretful effect of the current economy is that despite the well-known shortage of housing stock, house building will get harder. Costs are going up due to inflation, funding is getting more expensive, and sale prices will reduce.

So, the business case for development has deteriorated, projects will be delayed, and fewer houses will be built in the short term. This means fewer houses to sell, and less business for the agents and brokers in that segment.  

Buy-to-let and the rental market 

The rental market is in the eye of the current storm. On the demand side, a more difficult purchase market, means more demand for rentals. On the supply side, life gets ever harder for landlords, as interest payments and costs increase together with fewer tax breaks and more regulation, leading to lower yields.  

Inevitably, landlords will leave the market, and few new investors will enter. The buy-to-let market will continue to contract, despite spiralling rents.  

How to respond? 

Survival is job number one in a market like this. Businesses exposed to the property market are inherently cyclical, and a healthy business can trade through a difficult market as well as make attractive profits in the good times.  It would be prudent to plan for a 15 per cent reduction in transaction volumes – now is not the time to be growing headcount. But, of course, there are always opportunities in the face of change.  

I can see five key areas to focus on: 

1. Fight for repeat business: With less purchase business available, and in the face of interest rate increases, the remortgage market will be a battleground. Brokers are in a great position to help their customers find a better deal, however competition from price comparison and lenders is becoming increasingly fierce. It is a great time to start to use customer retention tools such as Dashly and Eligible to help to maintain relationships with customers and trigger a conversation at the right time.  
2. Get creative: In a dynamic interest-rate and property market, best advice may not always be obvious. If fixed rates have further to fall, then the best fixed rate available today may not be the best move. Brokers can help customers to get the best out of the market, for instance by moving to a variable rate with no early repayment charge and fixing once the rates have come down. Equally there may be opportunities to help customers downsize or look at equity release. Offering creative solutions, combined with market expertise gives brokers the edge. 
3. Think protection: Almost every mortgage broker could be doing more protection business, and this is also a win for customers in the face of economic uncertainty. As well as advising customers at the point of purchase, there are always opportunities to go back to previous customers as circumstances change and again, technology firms such as Anorak can help with simplifying the process.  
4. Use tech for efficiency: Cost savings will not come easily with inflation running at 10 per cent. This means that attention must turn to efficiency. Luckily for mortgage brokers, there are more opportunities than ever to work smarter. Next generation broker systems including Twenty7Tec, Smartr365 and research tools including Mortgage Broker Tools and Knowledge Bank can make the core advice job more efficient and the remote working infrastructure which everyone adopted during the pandemic can help make better use of time and be more available for customers. 
5. Always customer first: Brokers are more important than ever in a tough market. Being available, empathetic and proactive will stand out when customers have acute needs. The Consumer Duty will start to take effect in 2023 and given the challenging environment, it will be even more important to demonstrate that consumers are achieving the best outcomes.  

All told, it is unlikely to be a bumper year for mortgage brokers, but customers need advice more than ever, and facing the challenges will allow good operators to emerge stronger.