Within its third-quarter results that were published in late October, Lloyds laid out some alarming forecasts – in its “base case” scenario, it says house prices may fall by 8% in 2023, with a peak-to-trough fall of 10%.
And, in its “severe downside” scenario, it says house prices may fall by as much as 17.9% within the same timeframe.
We are heading for a turbulent time
The lender also detailed the fact that it had put aside £688m for dealing with loan defaults — including those of mortgages — because of a “deterioration in the economic outlook”, estimated as a 1% slide in GDP in 2023 in the former scenario and a 4.5% drop in the latter.
“Being the largest mortgage lender in the UK, Lloyds is uniquely placed to understand trends in property valuations, borrower afford-ability and buyer demand,” says Octane Capital chief executive Jonathan Samuels.
“Therefore, I would take the Lloyds base case of an 8% fall in 2023 as a very credible estimate of what is likely to happen. It is based on sensible estimates of a 4% base rate and inflation falling to 6.2%.”
Samuels adds that the “doomsday” estimate, which includes a 7% interest rate and 14% inflation, “was probably more likely on 27 October when the statement was released but, with Rishi Sunak steadying the ship as prime minister, this cliff-edge scenario feels very remote”.
Hargreaves Lansdown lead equity analyst Sophie Lund-Yates comments: “The best-case scenario is that [Lloyds] has over-egged its estimates and some of that [near £700m] hoard will be released, ultimately boosting profits.
“The more difficult scenario comes if the economic dive is steeper than predicted, which would see impairment charges swell. To a large extent, Lloyds can’t control the external forces that govern its customers’ behaviour, but its particular exposure to traditional lending, especially mortgages, puts it in the firing line when conditions sour.”
Repossession should be avoided at all costs. Nobody wants an increase in forced sales that create misery and drag down the housing market even further
Hargreaves Lansdown senior personal finance analyst Sarah Coles adds: “It’s difficult not to be concerned for the housing market. The Bank of England Credit Conditions Survey showed that, in general, the banks expect defaults to have risen in the three months to the end of August, and then to rise even further in the three months to the end of November. So worries about mortgage defaults are relatively widespread.”
And Mortgages for Business sales director Jeni Browne says there is “broad agreement” that house prices will drop in 2023.
“It’s the depth of this which is where the debate really kicks in,” she says.
“The same goes for defaults, either because borrowers cannot withstand higher borrowing costs or they simply become unemployed.”
Quilter mortgage expert Karen Noye says the outlook is clear.
“We are heading for a turbulent time. While the stress tests brought in a few years ago will mean that many people are able still to just about afford their monthly bills, it might be too painful for some, who will then opt to try and move into smaller accommodation and achieve lower monthly payments.
“If this happens all at much the same time then the laws of supply and demand dictate that house prices will drop.
“Defaults will increase, but it will be mounting stock on the market and little demand during the winter — when energy prices put people off moving — that will impact house prices.”
There is broad agreement that house prices will drop in 2023. It’s the depth of this which is where the debate really kicks in
Noye believes that, if mortgage arrears do increase rapidly, “the government may have to get involved and put something in place with the lenders, similar to when Covid hit”.
However, Samuels thinks lenders will try to avoid repossessions.
“Banks learned from the financial crisis of 2008–10 that repossessing in a falling market is a fast track to crystallising losses that are not necessary. It is better to work with borrowers who are struggling and sit tight whilst the market recovers. We saw this in extremis during the pandemic.
“Of course,” he adds, “the trouble could come when the fixed-rate periods end for customers and they go onto the standard variable rate that could be higher than the original stress tests.
“Repossession should be avoided at all costs. Nobody wants an increase in forced sales that create misery and drag down the housing market even further.”
Browne provides the last word: “Stay in touch with those who need help, do all you can to help them keep their costs down, and don’t talk the market down unnecessarily.
“We [the UK] are very good at talking ourselves into situations and this could be another example. The property dip will be exacerbated if we don’t keep to the facts but instead sensationalise when discussing it.”
