UK House Prices Are Rising Again, But So Are Arrears

Affordability will gradually improve this year as mortgage rates and inflation falls, say Morningstar DBRS analysts, but keep an eye on arrears and repossessions

Morningstar DBRS 30 May, 2024 | 10:20AM
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UK house prices are rising again, the jobs market is resilient and inflation is moderating. But there's been a spike in mortgages in arrears, say Morningstar DBRS analysts in their latest outlook on the housing market.

In the first quarter of 2024, after experiencing negative house price inflations on a year-on-year basis for four consecutive quarters, the UK saw a positive percentage change in house prices. The average UK house price increased by 1% in Q1 2024 on 2023 levels.

With wages rising, inflation moderating, mortgage rates stabilising, and house prices slowly increasing, affordability will gradually improve. Affordability is the key constraint of faster house price growth.

Arrears and Repossessions Rising

But the value of outstanding balances with arrears was £20.3 billion in Q4 2023, a drastic increase of 50.3% on a year-on-year basis and 9.2% on a quarter-on-quarter basis.

The cost-of-living crisis has affected arrears, but markets with more fixed-rate loans (like the UK) are less exposed than markets where floating-rate loans are more common.

Regardless, the proportion of total loan balances with arrears in Q4 2023 is just 1.2%. However, when analysing by degree of severity, we find it is somewhat alarming as the balances on cases in arrears as a percentage of total loan balances have shown a continuous increase for last few quarters. 

There is an uptick in repossessions as various relief measures related to repossessions applicable during the COVID-19 pandemic have been lifted, but the level still remains at a historic low.

Loan-to-Values Are Rising Too

There has been a continued rise in the proportion of loans with higher loan-to-value ratios (LTVs) since Q1 2010, but it has stabilised in recent years. Loans with LTVs exceeding 90% represented 5.5% of gross mortgage advances in Q4 2023, the highest observed since Q1 2020.

Mortgage rates have fallen since the end of 2023 (with the exception of new floating-rate mortgages), as a response to the lower inflation rate and stabilised bank rate, but they remain at high levels and volatile. The new mortgage rates since the beginning of Q2 2024 have increased by approximately 25 basis points as the market digested the news of higher interest rates for longer from the BOE.

Will House Prices Rise in 2024?

Tight financial conditions and persistent high inflation have slowed down growth of the UK economy. Our outlook is for a weak recovery. 

We still expect UK house prices to stabilise and show a modest increase during 2024. A number of factors support this, including low unemployment, moderating inflation, and strong wage growth. However, it will not be positive all around as borrowers are still rolling off attractive fixed rates and still adjusting to higher mortgage costs. This will lead to a continued increase in arrears, which remain at the highest point in the past six years

On the political front, the UK will hold general elections at the beginning of July, which could lead to a change in government and heighten some degree of uncertainty over policies.

This is an edited version of a longer Morningstar DBRS report on the UK residential mortgage market. Lorenzo Coccioli, Richa Pandey, Mudasar Chaudry, Ketan Thaker, Christian Aufsatz were the analysts on the report.

Any rating actions are those of Morningstar DBRS and not its parent Morningstar, Inc. In the case of deviation, the wording of the original DBRS report always prevails:

Will Britain Ever Build Enough Houses?

Read the Morningstar DBRS Report

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