The company said that it was clear that banks mortgage rates were landing at or above six per cent, which it said was the level it believed “default risk starts to increase materially”.
“We believe it is unlikely mortgage offered rates will come down soon. Considering affordability tests carried out by the banks will test rates going to eight per cent, we believe this will have a material impact on credit supply, house prices, and economic growth,” it explained.
Morgan Stanley said that it expected 30 to 40 per cent of householders in lower income brackets to face difficulties paying their mortgages.
However, a spokesperson added that the bottom 30 per cent of householders only represented five per cent of the mortgage books.
It continued that it expected yields to settle at around six per cent and despite changes in government plans “it is unlikely they will come down quickly”.
‘Lloyds more impacted by mortgage market dynamics’
Morgan Stanley added that it thought that mortgage volumes would be impacted from December onwards and it had downgraded its growth expectations for 2023 from 2.5 per cent to zero per cent in 2023 as affordability decreases and buyers withdraw from the market.
It said that it expected Lloyds would be more impacted by mortgage market dynamics as mortgages make up around a third of net interest income next year.
Morgan Stanley added that as it had a bigger credit card book it was more “vulnerable to credit losses into a likely recession”.
The firm continued that HSBC could fare better as it had a more “affluent customer base and focus on mortgaging”.
