Regulations built market resilience to higher mortgage rates

The housing market has adjusted better than many expected in response to higher mortgage rates over the last 2 years. Mortgage regulations introduced in 2015 played their part. Most new mortgagees had been stress tested at 6%+ mortgage rates which meant they were resilient to rate rises with few forced sales and modest single digit price falls over 2023. 

Transaction volumes felt the impact of higher mortgage rates more than house prices.  Uncertainty and higher borrowing costs resulted in many home buyers putting moving decisions on hold.  Transaction volumes fell to just 1m in 2023, down 23% on 2022 levels, and below the 1.2m long run average. 

Lower mortgage rates have supported a recovery over 2024

Housing market conditions have improved steadily over 2024, largely in response to lower mortgage rates, easing affordability. These spurred increased levels of buyer activity from the start of the year.  Home buyers, many of whom are also sellers, entered the market in growing numbers boosting available supply as mortgage rates fell with a 7 year high in the availability of homes for sale. 

Strong growth in new sales being agreed over 2024 had rebuilt the sales and new mortgage business pipeline. Zoopla calculates that the value of homes working their way through to a completion is 30% higher than Q4 2023. The value of mortgages being agreed for home purchase has also risen in line with more sales. The market is on track for 1.1m sales in 2024, a 10% increase on last year with some of this momentum set to flow through into early 2025. 

First time buyers are the largest buyer group in 2024

First time buyers (FTBs) are on track to be the largest buyer group in 2024 with an estimated 36% of all home purchases. Lower mortgage rates have drawn FTBs into the market while a 30%+ growth in rents has also pushed FTBs into home buying decisions. However, the mortgage regulations that stopped the boom and bust in house prices have increased the household income required to afford home ownership assuming lenders use stress rates of 8%+. Affordability remains the major challenge in southern England where prices are highest and a combination of loan to income limits and stress testing mean FTBs are under pressure to put down bigger deposits or to buy smaller, more affordable homes.  

Affordability is still a constraint on market activity into 2025

While the market has fared well adjusting to higher borrowing costs and activity levels have recovered, affordability and access to housing remain a constraint on sales volumes and house price inflation into 2025. In short, we believe the market needs an extended period where prices rise more slowly than incomes to help reset the affordability of homes relative to incomes. We expect UK house prices to rise 2.5% in 2025.

There is a clear north-south divide around this average. Housing is fairly valued outside southern England meaning house prices could well rise in line with incomes in 2025 and into 2026. The Office for Budget Responsibility is forecasting disposable incomes growth of over 4% in 2024 and 2025 slowing to below 3% by 2027. 

We expect house price growth in southern England to lag behind incomes into 2026 as affordability levels continue to adjust. 

Budget changes take the edge off market activity

Changes in the Autumn Budget compound this view with a shallower decline projected in the base rate and concerns over the extra staffing costs to businesses being passed on through lower wages as well as a weaker labour market hitting incomes growth.  There is unlikely to be the same impetus from lower mortgage rates to support market activity in 2025. We assume mortgage rates remain where they are today at 4.5% to 4.8% for new business and 4% to 4.5% as an average for the best rates for home buyers.

From April 2025, buyers in England and Northern Ireland will pay more in stamp duty costs as the tax regime reverts to 2022 levels. As the nil rate tax band falls from £250k to £125k, 40% of FTBs will pay stamp duty in 2025, up from 20% today and 83% of home movers will pay more, up from 49% today. These changes will cost the equivalent of up to  1% of the value of a home which buyers will want reflected in the price they pay, keeping prices and transaction volumes in check.   

Transactions volumes set to remain unchanged

While we expect UK house prices to post modest gains of 2.5% over 2025, what matters to lenders is the scale and sources of demand for secured credit to move home or additional borrowing to fund home improvements. 

We expect UK housing transactions to increase by 5% over 2025 to 1.15m, slightly below the long run average of 1.2m. Higher moving costs will act as a drag on mortgaged mover sales meaning borrowers will continue to focus on home improvements funded through additional borrowing.   

Opportunities from greater efficiencies and automation

Given this outlook for housing there are some segments and geographies that are set to out-perform the UK average while in others affordability remains a constraint to the scale of the lending opportunity. How the market will support business plans depends upon which segments of the market firms currently operate within. 

In addition to the market context, lenders have the opportunity to revisit their own systems and approaches to lending, considering options to improve efficiencies and open up opportunities for growth through greater automation of lending decisions in relation to property risk. Many are currently on a journey from 20% to 60% automation of property risk decisions. The opportunities to retain market share and win business from greater automation are real and worth considering alongside market based strategies for lending growth.   

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This article was first published in Society Matters magazine.