The latest data from UK Finance reveals that mortgage borrowing activity in the UK remained subdued in the second quarter of this year, despite an improvement in consumer confidence. Both house purchase activity and external remortgage activity experienced a decline, primarily driven by affordability challenges. This article aims to provide potential property investors with an understanding of the current state of the UK housing market and its implications for investment opportunities.
Q2 Housing Market
- House Purchase Activity:
In Q2, house purchase activity was down by almost a third compared to the same period last year. The decrease was observed among both home movers and first-time buyers, signaling affordability challenges as the main discouraging factor. UK Finance anticipates that house purchase lending will continue to be constrained in the near term due to these ongoing challenges. Although there was a small rebound in house purchase applications compared to Q1, completions are expected to decline in Q3. - External Remortgage Activity:
External remortgage activity also experienced weakness in Q2. While there was an annual rise in pound-for-pound remortgages, transactions involving additional money withdrawal declined. It is important to note that affordability constraints have not yet significantly influenced borrower behavior, although Q2 saw a decrease in pound-for-pound refinancing activity and a rise in product transfers. UK Finance highlighted that product transfers, which depend on lender maturity cycles, should not be considered as indicative of borrower trends. Nevertheless, the trade body observed a shift towards product transfers in the past year, coinciding with higher interest rates and increased living costs. - Affordability Concerns:
The trend towards product transfers has partly emerged due to the lack of affordability assessments. UK Finance’s findings suggest that borrowers who refinanced this year experienced rate increases but these were still within comfortable levels below the initial affordability stress rate. On average, borrowers who opted for internal refinancing were paying over two percent less than their initial stress rate. This indicates that borrowers should still be within their budgets thanks to regulatory lending requirements. The increasing prevalence of longer mortgage terms, with half of first-time buyers and a third of home movers opting for terms over 30 years, has started to level off. The trade body believes that this stretching of affordability has reached its limit as higher rates and inflation exceed the capabilities of longer mortgage terms. - Arrears and Possessions:
Headline arrears, signifying mortgage accounts with more than 2.5 percent arrears of the outstanding balance, saw an 8.3 percent quarterly increase in Q2. Although this figure remains low by historical standards, it represents the largest quarterly increase since 2009. However, on the positive side, cases of severe arrears (more than 10 percent of the outstanding balance) have decreased as lenders gradually work through the backlog created during the pandemic. UK Finance projects that there will be around 98,500 arrears cases by the end of December 2023. Possessions, reflecting the number of properties repossessed by lenders, saw a slight decline in Q2, likely due to lenders and courts working through the backlog. Nevertheless, UK Finance expects possessions to gradually increase throughout the year, influenced by the current cost of living crisis and the ongoing effects of the pandemic.
Conclusion
The second quarter of this year witnessed subdued mortgage borrowing activity in the UK, predominantly due to affordability challenges faced by potential homebuyers. Both house purchase and external remortgage activity experienced declines, while longer mortgage terms started to level off. Affordability concerns are influencing borrower behavior, leading to a shift towards product transfers instead of external remortgaging. While the housing market still presents investment opportunities for those on higher incomes or with larger deposits, potential investors should consider the impact of affordability constraints and ongoing arrears and possessions in their decision-making process