In the Bank of England’s latest Credit Conditions Survey (CCS), lenders reported that September’s mini Budget, which led to a spike in interest rates, a mass exodus of mortgage products and a wave of economic uncertainty, quashed borrower appetite in the last three months of 2022. And this trend is likely to continue for the first quarter of 2023.
In the CCS, lenders were asked to report changes in the three months to end-November 2022, relative to the period between June and August (Q3), and expected changes in the three months to end-February 2023, relative to the period between September and November.
Lending staying down
Lenders told the Bank of England they expect a drop in credit availability in the first quarter, after a similar in trend in the final three months of 2022.
The report noted that: “Lenders reported that the availability of secured credit to households decreased in the three months to end-November 2022 (Q4). Lenders expected the availability of secured credit to decrease further over the next three months to end-February 2023.”
Demand is the issue
However, while credit availability has dropped, the key issue is demand, according to the survey and to experts. Lenders surveyed by the CCS reported that demand for secured lending for house purchases decreased in Q4, and was expected to decrease further in Q1.
However, remortgaging was expected to increase slightly in Q1, despite a dip in Q4.
Andrew Wishart, senior property economist at Capital Economics, said: “The pull back in the supply of credit was far less severe than the drop in demand.
“Overall, while lenders may have tightened credit conditions, low demand due to high mortgage rates is likely to remain the main constraint on lending volumes this year.”
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown agreed with this assessment.
She said: “Mortgage demand dropped like a stone in the wake of the mini Budget, as rampant rate rises forced buyers to flee the market in droves. And despite rates falling back in recent weeks, the damage has been done – demand isn’t expected to recover in the next few months.
“Mortgage demand plummeted at the kind of rate we saw when the market was effectively shut at the start of the pandemic. The shock of the mini Budget, and the carnage it caused in the mortgage market, meant buyers faced massive rate hikes that left their plans in tatters.
“More recently rates have been dropping, but they remain significantly higher than before the chaos unfolded. Buyers are also reeling from the shock of the rate rises, which put a real dent in their confidence.
“So, although the fall in mortgage demand isn’t expected to be anywhere near so dramatic in the first three months of the year, it’s still expected to be down again. It will take a while for all of this to feed into the figures on house prices, but when it does, we can expect some significant changes.”
Defaults to rise
The Bank of England’s survey also revealed that while borrower defaults on unsecured lending were static in Q4, lenders expect them to accelerate in the first quarter of this year.
The report noted that: “The net percentage balance for changes in default rates on secured loans to households was unchanged in Q4, and was expected to increase in Q1.”
However, Coles believed that defaults were unlikely to spike sharply as most homeowners would put mortgages above other debt. Although she warned of issues around higher rates for those looking to remortgage.
She said: “Mortgage defaults were more stable, in part because people will prioritise their mortgage payments because the consequences of falling behind can be so severe. In addition, the fact that the vast majority of mortgage rates are still fixed means that huge numbers of borrowers were protected in the short term from rampant mortgage rate rises.
“The problem will come when they need to remortgage, which is one reason why mortgage defaults are expected to rise in the first three months of this year. There will also be those who are currently clinging on by their fingertips, and the fact that inflation is still running in double-digits is making it harder to hang on with each passing month.”
