What could happen to house prices next year?
According to Lloyds Banking Group, average prices could drop by 8% in 2023 and stagnate for the following four years.
The gloomy prediction from the UK’s largest mortgage lender is based on an expectation of rising interest rates as price inflation, and the cost of living remains high.
To cope with the expectation of falling house prices, Lloyds is putting aside £668 million to cover bad debts.
The prediction comes as Lloyds announced pre-tax profits of £1.5 billion for the third quarter of the year, down 25% on the same period last year.
When interest rates rise, banks tend to make higher profits. That’s because the gap between what they charge for lending and what they pay on savings is wider.
However, rapidly rising borrowing rates in the past year have resulted in Lloyds taking a more pessimistic view of the UK economic outlook.
While Lloyds believes most of its mortgage customers will be able to withstand the cost of living crisis, they expect a rise in the number of mortgage defaults.
William Chalmers, chief financial officer at Lloyds Banking Group, said:
“So far at least, our customers are proving to be resilient and adapting well to the cost-of-living increases that we have seen.
“We are deliberately ensuring that we lend to customers who are best placed to withstand potential future stresses on the macro level and in their own personal circumstances.”
For now, the number of customers experiencing mortgage arrears, defaults and write-offs are at low levels and, in any case, below the levels seen before the onset of the pandemic.
Mr Chalmers also commented that lending at Lloyds is skewed towards “slightly better off” customers, which increases the likelihood of paying back their loans should economic conditions become tougher.
The report forecast that the Bank of England interest rate could peak at 4% in 2024 before falling back. The interest rate is currently 2.25%.
A higher interest rate environment is likely to result in a slowdown in the UK housing market.
They also commented that an 8% fall in house prices, should this materialise, could force some recent buyers into negative equity.