Mortgages
UK ‘most stressed’ mortgage market in Europe as arrears expected to hit 1.5% this year
Expected mortgage losses in the UK will increase this year but remain “manageable” with arrears greater than 90 days to rise from 0.75% to 1.5t% in 2023.
Despite the increase, arrears should stabilise in 2024, according to Fitch Ratings. The agency added that arrears levels had been at “historic lows” at around 0.8%, which it said showed “strong asset quality”.
The firm explained that mortgage lending growth had been strong over the past few years due to government support and low interest rates.
Fitch said: “We expect the market to soften, arrears to increase and credit losses to rise to more normalised levels, given higher mortgage rates and affordability pressures; however, losses should remain manageable.”
Unemployment and rate rises negative drivers
The ratings agency said that rises in mortgage rates and unemployment are expected to be a catalyst for a rise in arrears.
It said that worst case scenarios for banks showed that unemployment rates would rise by between 6% and 9%, which increases expected credit losses “materially”. The report said that on average this would be more than double.
However, Fitch said that banks’ strong profitability should provide a “solid buffer” to rising credit losses.
UK likely to enter recession this year
Fitch aso noted that the UK economic had “held up” in the first quarter of this better than forecasts had predicted, but was still “likely” to go into recession this year.
The company pointed to unemployment rate rising to around 5% but not returning to levels seen during the global financial crisis.
It added that bank rate would peak at 4.75% in May this year and no rate cuts were likely until 2024.
The firm said that higher interest rates would increase households’ interest payments and that debt service burden would increase to around 10% of disposable income.
Fitch continued that house prices could fall by up to 7% in 2023, which it noted would “wipe out most of post-Covid real appreciation”
It continued: “Downside risks are present due to the macro environment, but housing undersupply would limit much steeper price declines. Double digit rental growth is possible, but affordability for renters becomes an issue.”
