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House Price Support From Mortgage Conditions is Fading

A new report on UK home price growth by Fitch Ratings expects  overall affordability to start to deteriorate, after large improvements since the global financial crisis.

Fitch expects mortgage payments due on new loans to grow faster than wages over the next two years. As a result, it anticipates that mortgage affordability, measured by average mortgage payments for new loans as a proportion of household median net income, will deteriorate by about 15% by the end of 2023.

Favourable mortgage lending conditions in terms of loan to value (LTV), loan terms and most importantly interest rates have been a major driver of home price growth since 2009. Rising interest rates, further household cost pressures and increased transaction costs after the end of the 2020-2021 stamp duty land tax holiday underpin Fitch’s home price growth expectation of 1-3% in both 2022 and 2023.

UK home prices increased by 10.8% in 2021 and by 82.2% since the start of 2005, based on HM Land Registry data. Mortgage financing conditions have been a key driver of this growth, with interest rates having fallen 3.4pp during the period and the average loan term increasing by four years, supporting borrower affordability.

Fitch calculates that relative to median income, mortgage affordability has improved by 30% from 2005 levels. This improvement is due entirely to changes in financing conditions. However, holding 2005 conditions constant, median income mortgage affordability would have deteriorated by 14% as home price growth exceeded income growth during this period.

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