Report forecasts declines or lower growth in 15 countries – but UK market impacted more than most
UK home prices could drop by as much as 7% next year, mirroring substantial price declines across many parts of the Globe, according to a new report by Fitch Ratings.
The ‘Global Housing and Mortgage Outlook – 2023’ analysed the housing market in 15 countries, concluding that house prices in the UK are expected to drop by between 5% and 7% in 2023.
However, although there will also be price declines in most of the 15 countries analysed by Fitch Ratings, the UK will be affected more than most next year, with only Denmark expected to see home prices fall more sharply (down by between 7% and 10%).
According to the report, only Canada is expected to follow the same downward trajectory in home prices as the UK in 2023.
Ominously, Fitch said further price reductions in the UK “cannot be excluded” in 2024, pointing out that the sharp rise in interest rates, which it said had been more pronounced for the pound than other European currencies, had “significantly pressured affordability”.
This will continue to be the case next year “even if mortgage rates ease”, it added.
However, all things being equal, home prices are expected to stabilise in 2024, experiencing only a 1% drop at most.
Reviewing the year now ending, the report noted that the UK’s fixed mortgage rates, which account for most new lending, were quoted above 6% during the last quarter and were sharply up from about 1.5% at the start of the year.
Read more: Halifax reports largest monthly house price fall in 14 years
Housing supply crisis
Aside from high rates, an additional problem for the UK housing sector is the under supply of homes.
“The UK continues to build insufficient new homes to meet demand, and this lack of supply supports a limited price decline despite the additional affordability challenges of inflation, falling real wages and an expected 1.3pp increase in unemployment by end-2024,” the report said.
Foreclosures low
On a more positive note, Fitch said it expected only “a modest rise in foreclosures”, saying lenders “will be accommodating with forbearance provided borrowers can meet interest payments”.
It added: “Foreclosures create downward pressure on prices, so more aggressive possession activity could lead to a larger fall than forecast.”
Separately, late-stage arrears are set to double in 2023, with those greater than 90 days predicted to increase from 0.75% to 1.5% in 2023 before stabilising the following year.
Notably, the payment shock from rising interest rates and falling real wages “will challenge affordability for weaker borrowers”.
In addition, borrowers paying floating rates, roughly representing 17% of the market, according to the Prudential Regulation Authority, will immediately be vulnerable to rising rates, while borrowers with the typical fixed-rate period of two to five years facing rate rises when the fixed rate expires.
Fitch estimated that up to £217 billion of fixed-rate products will mature next year, and that the expected peak in the Bank of England base rate of 4.75% in 2023 will drive higher mortgage rates resulting in increased arrears.
“We consider legacy non-conforming loans and loans to borrowers with a high loan/income ratio more vulnerable to underperformance. Some buy-to-let landlords may also ace difficulty if tenants fall into significant rent arrears,” the report said, adding that landlords seeking to refinance after fixed-rate periods could find less favourable terms as a result of falling home prices and higher interest rates.
Fitch said it expected unemployment in the UK to increase to 5% by 2024, which will likely to “keep arrears below the 2009 peak”. However, it warned that a deterioration in the labour market “beyond our expectations” could lead to arrears above the forecast.
Read more: House prices start to fall, RICS survey finds
Global review
Nominal home price growth will decline or slow substantially in most countries next year, mostly as a result of cooling demand due to high mortgage rates and the rise in the cost-of-living.
The report also highlighted that the period of price declines in the second half of 2022 was also apparent in Australia, Canada, China, Denmark, Germany, the Netherlands, and the US.
Significantly, the report predicted that loan performance will deteriorate due to worsening “macroeconomic headwinds” and inflation, which will erode incomes.
Although a sizeable proportion of UK mortgages are floating rate or short-term fixed and therefore vulnerable to rising rates, Fitch did not expect arrears to approach levels seen during the 2008 global financial crisis, thanks to higher levels of home equity, disciplined underwriting, tighter financial regulation, and borrower support offered by lenders.
