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House market to ‘soften’ in 2023 as arrears and repossessions tick up

Nick Cheek
Written By:
Nick Cheek

The mortgage market experienced “relatively subdued growth” in 2022, but 2023 will see a weakened market, with more long-term mortgages arrangements and a slight rise in arrears and repossessions.

According to the latest UK Finance Household Finance Review, 2022 experienced “exceptionally strong purchase activity and double-digit price growth” due to the stamp duty holiday and changes in housing demand due to the pandemic. Gross lending rose by around 1.9% year on year to around £313bn.

Softer purchase market expected this year

However, UK Finance predicted a “softer purchase market” in 2023 as the cost-of-living crisis and interest rates over the course of last year were “baked into both household budgets and affordability calculations, and so bearing down on effective demand”. It continued that the Bank of England had also pointed to a “weak start” to 2023 for mortgage lending.

The report said: “Anecdotal evidence suggests that January may have seen something of a recovery in borrower interest for both house purchase and remortgage, although the extent to which any such recovery translates into borrowing activity remains to be seen.

“Notwithstanding this, a softer market is expected through the year, particularly compared with the buoyant levels of the past two years.”

Average buyer nearing retirement before paying mortgage

UK Finance said that, with house price growth outstripping wage growth, and affordability becoming more constrained, a greater proportion of borrowers were entering the market at higher income brackets.

Another trend noted in the report was first-time buyers and movers borrowing over a longer term to stretch their affordability.

The average term for a first-time buyer loan stands at 31 years, and more than half of first-time buyers borrow with a term over 30 years. This means that the average buyer entering the market could approach retirement age before they pay off their first mortgage. The report noted that around a third of new loans for homemovers were for a term of over 30 years.

Arrears and repossessions ticking upwards

UK Finance said that it “expected to start to see signs of increased payment stress in the latter part of the year”, although it takes a few months of missed payments to accrue to arrears of 2.5% or more.

It added that arrears rose by around 1,000 cases, bringing the total to 81,000n which was in line with figures seen at the start of the year.

UK Finance said lender forbearance was a “key factor” in mitigating arrears and that the “lending industry has deployed and continually improved its range of options available to help customers struggling with their mortgages”.

Possession increased in the first three quarters of the year but dropped in Q4 due to a voluntary cessation during the festive period. It said that possessions were lower than in any other year since 1980, when the stock of mortgages was half the size of current levels.

UK Finance stated that it expected possessions to grow, with 7,300 forecast for the year.

It explained: “This low level of activity reflects the industry working through the mostly pre-pandemic backlog of the most serious arrears cases where all other options had been exhausted, with possession being the final option in the best interests of the customer.”

The firm added that arrears would hit around 110,000 by the end of 2023.

“Although there are downside risks – including an adverse labour market shock and further unexpected economic fallout from the ongoing war in Ukraine – our current outlook for arrears and possessions would see increases, but for both to peak well below the levels seen in the downturns of the 1990s and 2000s,” it said.