Paul Broadhead, Head of Mortgage & Policy at the BSA, gives an update on the current challenges in the UK housing and mortgage markets.

First published in Mortgage Finance Gazette.

Following the month-on-month spiralling house prices we saw in 2021 and most of 2022, which was quickly followed by considerable market volatility post the Kwarteng mini-budget, it's with some relief that the housing market is now more settled. But that doesn’t mean we can be complacent.

The latest Nationwide House Price Index shows that on a national level there has been price falls for four consecutive months, with the expectation that prices will fall still further, perhaps as much as 10% in some regions. However, putting that in context, house prices still remain considerably higher than they were in 2020, a time when affordability was already a challenge for many. The rise of the Bank Rate to 4% last week, the tenth increase in just over a year, will therefore have been unwelcome news for many homeowners. The last time we saw rates at this level was during the financial crisis in 2008. 

Alongside higher interest rates, rising inflation and cost of living are also impacting household budgets, all of which is likely to have led to a drop in sentiment in the housing market.  The latest Property Tracker Report shows that around half of the respondents do not think now is a good time to buy a property.

Thankfully despite households experiencing an increase in almost all their monthly expenses, we are not seeing an increase in mortgage arrears at the moment. Lenders are of course on alert for borrowers who may be struggling financially, and have the tools and teams on hand to provide tailored support when and where it’s needed.

So despite some of the challenges of the last two years having abated, we now face new challenges and the housing market remains fragile. Mortgage affordability continues to be a key barrier to buying a home. The Property Tracker Report highlights that raising a deposit has been preventing more than half the respondents from buying a property since mid-2020. 

It’s important that we consider today’s challenges and respond with appropriate support to keep the housing market moving during what is likely to be a recession year for the UK. It’s not just lenders and brokers impacted by how active the housing market is, many others industries such as conveyancers, removals and valuers are also dependent on a buoyant property market. The wider economy also benefits as new property owners make their houses into homes through renovations, decoration and home furnishings.

Supporting first time buyers on to the property ladder is a key requirement for an active housing market. The extension of the 95% mortgage guarantee scheme was therefore a welcome move and whilst the numbers are small, the scheme gives confidence to the market and ensures competition remains in the low deposit mortgage space.

Also with aspiring first time buyers in mind, we’ve written to the Chancellor urging him to review the rules of the savings schemes which aim to support them in his Spring Budget. The Help to Buy ISA (HTB ISA) and Lifetime ISA (LISA) and have not been reviewed since they were introduced in 2015 and 2017 respectively, despite significant house price increases. This is now limiting first-time buyers’ ability to buy a home, particularly in London. And to add salt into the wound, if the savings are used to buy a property above the scheme thresholds, the first-time buyer not only loses the Government bonus, but they’re charged a penalty equal to 6.25% of their own savings. This needs to change. We’re calling for an immediate increase in the thresholds and for them to be reviewed on an annual basis. We also want to see a reduction of the withdrawal penalty so those who access their savings outside the scheme rules, forfeit just the government bonus and not any of their own savings.

Often it’s the cumulative effect of a number of small changes that can have the biggest impact.