At the time of writing, the Prime Minister has ruled out any support package to assist UK mortgage holders in tolerating the increased burden of further rate rises, so in this week's blog, we take a closer look at what this may mean for the broader housing market, and pose an alternative view as to what may unfold, whilst trying to keep what is an increasingly worrying situation light, and concentrating on the facts as we know it.
On Sunday morning, as many were enjoying their breakfast, a rather weary-looking Michael Gove MP faced off against the formidable Laura Kuenssberg to answer questions on the escalating problem in the mortgage markets. A rather unenviable task, given the segment, began with a lengthy viewing and uncomfortable reaction to the 'partygate' shenanigans. Framed to come across like an exasperated judge on Strictly Come Dancing being forced to critique a disappointing Cha-Cha-Cha, this set the tone for a somewhat agitated tete-a-tete with no apparent conclusions. In hindsight, to get one final use out of the 'partygate' analogy, this heavily choreographed political quickstep avoided what was to come; there is no support package in the works, and the markets will be left to resolve themselves.
The situation in the mortgage markets is set to become difficult, as the average fixed rate deal is due to hit 6%+, given 6.3million mortgages or 74% of what's been written, are fixed between 2 and 5 years; this isn't akin to previous mortgage prisoners issue that sat at around 195,000 households in 2021, these numbers are the lion's share of the market, and the media have been quick to run the numbers on what could be millions in difficulty. We want to approach this with sensitivity, as given the volumes of fixed-rate deals sold at such low rates, there is enormous potential here for consumer difficulties. Still, one of the critical metrics worth monitoring is default rates.
There were 76,630 homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance in the first quarter of 2023, 2 per cent greater than in the previous quarter, according to data collected by UK Finance. We are still waiting to see the levels of delinquency we saw in the run-up to the 2008 financial crisis, which ran tenfold above these levels, which may indicate that although times are getting more challenging for the public, we aren't yet in a situation where millions may be forced into arrears, one of the many doomsday scenarios being suggested.
The next milestone in monitoring the impact post a base rate announcement later this week will be the next lot of ONS figures due out on Jun 21st; this will be the most critical data set on housing we have seen so far this year, as it will give a strong indication of where we are going in Q3 & Q4 in terms of the overall strength of the market. There have been some nominal early positive indicators, the levels of cash buyers in the market can't be differentiated to extract downsizers, but the numbers have risen to 38.5% of the market according to Savills, which may suggest more investors are stepping in to take advantage of the retracement in price.
Indeed, looking at 'super prime', which is almost an uncorrelated market all on its own, Knight Frank stated that "more than 160 properties worth £10m or more were sold in London in the financial year just finished – the most since 2016 when Brexit spooked the market", proving that money is still flooding into the city. The rising levels of debt in the economy mean that the debt holders are getting exponentially wealthier, which doesn't make excellent copy when looking at problematic conditions in residential housing. Still, it does mean that under these conditions, there is always a bid in any falling market. We saw this in the aftermath of the 2008 financial crisis; by late 2009, the unwind in housing had more or less been wholly restored, back then it was because the market was flooded with cheap debt to regain confidence, now we believe it will be the amassed wealth from the same sector that will provide the bid in the market and sustain asset pricing.
When appropriately structured, one of the critical components of the p2p is the level of downside protection on offer when incorporating the gross development values on offer. As a crucial metric, keeping that figure with enough headroom to absorb asset price swings is how we protect our investors, and that's why we typically structure at 65% LTGDV; we want to extract as much value as possible from our client's projects for them, and - offer an attractive downside protection metric for our investor clients.
We believe that our investors will see the market opportunities the same way we do, there are many issues to tackle for the Government, but the central one also happens to underpin the enormous value in the sector; as of today, the UK has a backlog of 4.3 million homes that need to be added to the national housing market as they were never built. This housing deficit would take at least half a century to fill even if the Government's target to build 300,000 homes a year is reached. Housing, sadly, has become a scarce asset that isn't optional, so it's a basic assumption that it will always be profitable to make, sell, and own unless everything we understand about supply and demand economics is incorrect.
Invest & Fund has returned over £140 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
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