Britain is well placed to deal with a downturn in the housing market

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TBut MacWaters, a 30-year-old television production manager, and her husband may have managed to buy right at the height of the housing market. Like others of their age, the couple used their savings, as well as some money from her parents – and, in their case, emptying their Australian pension pot – to accumulate money for investment. They moved from a rented flat in London to a house in Bicester, near Oxford, last April. “I love it,” she says. “[The mortgage bill] the same as our rent for the one-bed in London.”

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Not for much longer. After taking out a one-year fixed-rate mortgage because “the economy was so messed up at the time”, they now face a huge increase in their housing costs. Even the best deals available would see the couple’s monthly housing bill rise by £300 ($370), more than 25% more than they are paying now. “It’s a little grim,” she says.

According to data from the Office for National Statistics (ONS), more than 1.4m fixed rate mortgages will expire this year. Almost all of these mortgages have an interest rate of less than 2.5%; two-year fixed-rate mortgages typically cost more than double that, at around 6%. The average variable rate mortgage, which tracks the Bank of England’s base rate, is around 4.4% and will rise further as the central bank tightens monetary policy. Higher mortgage bills will be painful. The big question for the economy is whether they point to something truly ominous.

As in many other countries, housing transactions have increased in Britain due to the covid-19 pandemic. Low interest rates, a temporary freeze in stamp duty on some property sales and the spread of working from home combined to create a boom for space. First-time buyers were enthusiastic participants in the market, accounting for more than half of all new mortgages during the pandemic. Between March 2020 and November 2022, the average cost of a house rose by a quarter, from £233,000 to £295,000, according to official statistics.

That rise in house prices is now completely reversed. “Affordability is significantly affected by higher interest rates,” said Andrew Burrell, property economist at Capital Economics, a consultancy, which expects a top-to-bottom drop of 12% in house prices. Savills, the estate agent, predicts that house prices will fall by 10% this year, the steepest fall in prices since the financial crisis in 2008.

But such a drop would bring the average house price right back to the level it was at in the second half of 2021. For most of last year, house prices continued to rise. All of that ended in October. “Mortgage rates went up due to the Truss turmoil,” says Neal Hudson from Residential Analysts, a consultancy, referring to the impact of the disastrous budget published by the Liz Truss government. The cost of government borrowing has fallen since Ms Truss’ policies were reversed, but mortgage rates have remained high.

The wave of first-time buyers during the pandemic will be at the extreme end of this trend as they have larger mortgages and less equity. The only mortgage metric “flashing red”, says Mr Hudson, is the loan-to-income ratio. Low interest rates allowed borrowers to spend the same amount of their income on housing while taking out a larger mortgage. Even small rate increases, by historical standards, will have a big impact on budgets. According to the Resolution Foundation, a think-tank, the average mortgage holder who renews their policy in 2023 will see an annual increase of £3,000 in their bill, enough to cover their household income. have reduced by 12%.

“We can afford it,” said Mrs McWaters, of the increase in her mortgage bill. She and her husband, who also work there TV, they will reduce the amount they usually put in savings, towards their pensions, until they themselves go over. Others, however, struggle. Debt advice charities report seeing a steady increase in the number of home owners seeking help; they usually make up only a small percentage of their caseloads. Morgan Wild, head of policy at the Public Advice Bureau, says many people are showing up after falling behind on their energy bills, after trying to cut back elsewhere to pay off their mortgages. to keep going over.

Borrowers have more options than before. In August the Bank of England scrapped an affordability test, introduced in 2014, which had limited the range of mortgages that could be offered. Removing this rule will allow some banks to offer more interest-only or variable-rate mortgages to those coming off fixed deals. “What the regulator and the banks are both thinking is, if this is a period of high rates, we don’t want high levels of repossession,” says Lucian Cook, head of residential research at Savills. That is a lesson learned from the housing body in the early 1990s.

Trouble in the housing market is unlikely to trigger the same kind of vicious cycle of bank failures as it did in 2008. Banks are better capitalized and mortgage rates have improved. In 2007 almost 15% of mortgages had a loan-to-value ratio of over 90%; in 2021, the last year for which the Financial Conduct Authority, the regulator, has a full set of figures, the proportion was around 4%. Data from UKFinance, an industry group, shows that the average first-time buyer’s mortgage would have a loan-to-value ratio of around 77% in 2022, compared to more than 80% in 2007. very few of them are likely to fall into negative equity.

That won’t be much comfort to first-time buyers during a pandemic, who will have to pay higher bills for an asset worth less. But it gives some reassurance to regulators and economists. Housing will not help the economy this year, but it is unlikely to be dragged into a deep recession.

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