Persistently high inflation and the recent spike in lending rates will trigger a correction in the UK housing market, a Moody’s analysis predicts.
“We expect a decline of up to 10% in house prices over the next two years would not diminish the creditworthiness of the issuers we rate, but our simulations of a sharper housing downturn would hurt their credit quality significantly,” said Moody’s.
Its report covers the credit implications for the UK sovereign, housing associations and banks.
- House prices will fall 10% over the next two years.
“The combination of less affordable mortgages and high inflation putting a dent in incomes will trigger a correction in the UK housing market.
The relatively large share of short-dated or variable-rate mortgages exposes the existing stock to tightening monetary policy.
Strong fundamentals such as a robust labour market, tight underwriting standards and housing supply shortages will prevent more severe credit implications.”
- Credit effects will vary by sector but are contained overall
“Under our baseline scenario, we expect UK real GDP to contract slightly in 2023 before returning to growth next year.
The implications for the UK sovereign are limited, particularly if the housing downturn is short-lived.
While weaker growth will slow the pace of deficit reduction and keep government debt at its current high level, we have already captured this in our Aa3 sovereign rating.
A predicted small rise in unemployment should not affect large banks.
Strong underwriting standards have reduced the riskiness of their mortgage books, and higher net interest margins will more than offset any losses.
Those housing associations (HAs) relying on market sales are most vulnerable to house price falls, but current ratings already consider this scenario.”
- A bigger house price drop would increase credit risks
“We simulate the macro implications of a 21% decline over two years to assess credit implications for UK issuers.
The UK sovereign would enter a recession in the second half of 2023, lasting six quarters.
Unemployment will reach 6% by the end of 2024, which is still below its peak in the global financial crisis.
The UK economy would weaken, but healthy household balance sheets and a highly competitive services sector would soften the blow.
Fiscal implications would be more significant, with government debt increasing from high levels.
Banks would face higher credit losses, though a large rise in defaults is still unlikely given the limited increase in unemployment and forward-looking provisions banks have already made.
The credit implications for the most exposed HAs would be marked, while indirect channels such as higher arrears would weaken financial performance across the sector.”