A likely impending recession – perhaps a global one – coming hot on the heels of the twinned rise in inflation and interest rates, has catalysed expectations for a ‘bursting’ of the supposed bubble in UK property.
A sense of uncertainty over the direction of travel is already influencing the decision-making of investors, brokers, and residential homebuyers. This is quite natural, given the multifaceted nature of the problems in the economy; it is difficult to predict whether house prices will rise or fall, or whether activity will heat up or cool because individual circumstances will be impacted in very different ways.
Increases to the Bank of England’s base rate are widely expected to play a key role in suppressing house prices; the historic lows we have seen over the last decade have been crucial in facilitating the buoyant UK market through challenging times before, and so an inversion of this raises questions about whether the foundations for growth remain secure. Likewise, it is not yet clear whether inflation will dampen the appetite of investors to the market.
However the market takes shape over the coming months, it is increasingly clear that lenders must be alert to a number of factors; and that being proactive in facilitating market opportunities and supporting clients could be pivotal in the fortunes of real estate.
Growth opportunities
The short-lived Truss government experienced – to put it lightly – a baptism of fire following the unveiling of its “unashamedly pro-growth” mini-budget. Kwasi Kwarteng’s mini-budget lasted just three weeks before being reversed almost in its entirety by new Chancellor Jeremy Hunt – with the notable exception of the cuts to stamp duty.
Now, with the leadership of the country changing hands again to another new Prime Minister in Rushi Sunak, it remains to be seen whether these cuts will endure the course of a new legislative agenda. We can, however, speculate on how they would influence the market.
In short, this is likely to kickstart any flagging demand throughout the market – few will have forgotten the frenzy of 2020’s stamp duty holiday, and the substantive impact it had on prices and volume of activity. Arguably, the market has rarely settled since.
It can be argued that the permanent nature of this cut means it will naturally not provoke such a frenetic period – residential homebuyers, for instance, may gamble on waiting for interest rates to drop before taking advantage of cheaper borrowing with reduced one-off costs.
Equally, high net worth individuals (HNWIs) are relatively inelastic to hikes in interest rates and are more inclined towards intangible factors such as prestige when looking at a property. This means that, for instance, the Prime Central London market may behave radically differently to the broader UK market.
It should take time for lenders and brokers to observe and reposition for these trends – the pandemic stands as a strong example of how quickly predictions can be subverted, and it is certain that the finance industry will not want to be caught playing catch-up if flurries of new demand arrive.
One such source could be overseas investors; the weakening of the pound and the UK’s relatively fast pace of travel towards higher interest has placed many investors from countries with notable interests in UK property at a competitive advantage, with cheaper debt on cheaper prices when compared with domestic buyers.
This must all be balanced against the perennial issue of vanishingly low UK housing stock – even if buyer demand within the UK falls as a result of higher interest rates or economic uncertainty, it is the shortage in supply that makes a property bubble burst seem unlikely.
Whichever way the property market responds to the current macroeconomic trends, lenders must be agile in serving the needs of borrowers and brokers. Here, specialist mortgage lenders have a key role to play.
The narrow criteria for assessing applicants favoured by mainstream lenders are often found unsuitable when the market, and the buyers interested in it, become less uniform. HNWIs are a great example of this.
Variety will be critical. Offering longer-term fixes alongside short-term loan products, while opening communication channels to ensure customers are confident in their ability to find a refinancing option on their existing debts will help soothe any sense of panic and help keep the market accessible.
All of this is underlined by clarity and confidence in communication – enjoying a close relationship with brokers and borrowers alike ensures there are no surprises on either side. Many lenders lack this personal touch and can be caught out when it comes to responding to significant, but manageable, changes in an individual’s circumstances. I am certain that maintaining these tight relationships will be crucial in engaging new customers and retaining old ones.
