Tatton teaser: Housing Costs

Posted 12 January 2023

Despite the UK economy growing at one of the fastest rates (+4.4%) of the developed economies in 2022, economists have forecast the UK to have a more significant slowdown in growth (-1.5%) than the rest of Europe (-0.1%) in 2023. One of the key determinants and a signal of the coming slowdown in the UK is housing and access to credit.

At the end of 2022, first time buyers mortgage payments increased to around 40% of take home pay across the UK, increasing from under 30% in less than a year. Borrowing costs increasing following the Government’s disastrous mini-budget and the Bank of England rate rises to combat inflation.

There is some good news for house buyers as average house prices falling, but the bad news is the Bank of England’s duty is to combat inflation, not support the property market, and will keep increasing rates to fight rising prices. If the cost of borrowing continues to rise, any disposable income that would have gone to savings or used for other consumption would be moved to financing.

Based on the current refinancing rate it wouldn’t be too extreme to expect mortgage costs to peak at around 50% of take home pay – which will add to wage demands, which has the danger of embedding inflationary cost increases. There are signs that inflation pressures are dissipating but it will take time for the Bank of England’s to change its interest rate policy and increasing wages to pay for mortgages will not help. A very difficult path for the Government and the Bank of England to follow.

Thank you Chris Robinson for this note.