Speaking at the Association of Short Term Lenders (ASTL) conference, Lucian Cook (pictured), head of UK residential research at Savills, said that first-time buyers “stretch themselves further when they buy their first house and are more exposed to the increases in the cost of debt”.
He added that they no longer had the support of Help to Buy, which is due to come to an end on 31 March 2023, but closes for new applications on 31 October.
“They may face a situation where their deposit is hard to raise and the cost of servicing a mortgage debt is going to be relatively high. That’s not a particularly great combination for first-time buyer,” Cook explained.
He added that the second group that would be hardest hit would be buy-to-let investors as they can “only operate at lower loan to value levels to make the maths work”.
Cook continued that this was particularly the case if they did not use a corporate structure and did not benefit from the reduced tax rate.
He continued that cash buyers and outright owner occupiers would be the least affected.
Downward pressure on prices and transactions expected
Cook said that over the coming months he expected downward pressure on prices and transactions, but this was partially dependent on interest rate rises and where they peaked, how long it was maintained and then how it was eased back.
Citing Oxford Economics figures, he said that their forecasts suggested the base rate would rise to four per cent and stay at that level for around 18 months to contain the risk of inflation and rates would then be brought progressively down to 1.75 per cent.
Cook continued: “There is going to be some short-term pain in the UK housing market that will certainly last through 2023 into 2024. But after that point, there is the prospect of affordability will ease back and if rates do return to that relatively…benign base rate of 1.75 per cent you can then return to a period of house price growth.”
He added that Oxford Economics also predicted that unemployment would rise due to shallow recession but that figures would stay below five per cent which reduced the risk of employment-led repossessions bringing a lot of stock to the market.
Cook posited that existing borrowers with 12 to 18 months left on fixed rates would be unlikely to move in the near-term as they had lower mortgage debt
He noted that some on variable rate deals coming to an end may bring some stock to the market, but it wouldn’t be a “deluge of stock”.
With prospective buyers and sellers, Cook said that they “clearly face increased mortgage costs or reduced budgets”.
“They’re either going to put their plans on hold or they are going to proceed with a lower budget,” he added.
“This is a market which is going to be much more needs based, much more driven by people with equity or with cash.”
He added that the downward pressure on prices would not be like that late 1980s, early 1990s or 2000s where prices “essentially flatline for a year” but it would be more “severe”.
Cook added that there would be more people “seeking sanctuary in the rental market” which would lead to more accidental landlords and tenants.
Regulation and lender forbearance will help people struggling
Cook continued that banks were “already geared up to a degree of forbearance to help people get through this period of elevated interest rates”.
He explained: “Banks are fearful of reputational risk in this particular market. You only have to look at a lot of their branding and what they’re setting out to achieve from a public perspective.
“So, I think a lot of them will be looking at the possibility of extending mortgage terms, the possibility of capital repayment holidays for the period that we have higher rates. Those things will reduce some of the pressures on the housing market.”
He added that regulation implemented after the global financial crisis, such as the stress test, meant that borrowers had “some ability” to withstand financial pressures, they could dip into savings, curb spending or borrow money.
“It will be uncomfortable and it will be painful, but does that does not necessarily mean that it will not be wholly unmanageable over that period,” he said.
