How lenders are preparing for a complicated real estate landscape

In the UK, real estate is never far from the headlines.

However, in times of broader economic concern, the market has come under even greater scrutiny.

This is how speculation is rife around the future prospects for real estate on these shores.

One should not underestimate how the combined challenges of spiraling inflation and rising interest rates will influence the functioning of finance for the foreseeable future.

Inflation will weigh heavily on businesses and households, while a deviation from the historically low interest rates we have enjoyed in recent years will likely stifle some people’s path to the homeownership ladder.

In turn, lenders need to be mindful of how the real estate market will shape in response to a drop in demand in some areas, but also an influx of new demand in others.

While much of the focus on the impact of these market conditions rightly focuses on their impact on the majority, we are also certain to see changes at the high end of the market – to which the financial sector must be agile.

Real estate market resilience

Reasons for optimism abound.

The most recent set of house price data from NSO highlighted a 15.5% rise in the year to July 2022 – fueling speculation of a bubble; and the frenzy of anticipation for his breakout, which will naturally follow such talk.

It should be noted, however, that this price increase is weighted by the period of calm following the end of the stamp duty holiday in the summer of 2021.

Nonetheless, it highlights impressive growth in a tumultuous year.

This price growth has proven sustainable during a turbulent time in the UK testifies to the market’s prestige – it is by no means ‘unsinkable’, but has proven resilient to speculation about its decline over the past many periods where cooling appeared as the natural course.

Now, however, some of the underlying economic factors of the past decade that contributed to such strong price growth are reversing.

Factoring in the specter of high long-term interest rates and runaway short-term inflation involves a somewhat different set of calculations.

It would have been foolish to depend on interest rates staying at such low levels forever.

Whether forced to give up or encouraged by government policy, the Bank of England’s rate hike has always been inevitable.

Indeed, one need only go back to the 1990s and 00s to find interest rates that underscore that borrowing remains cheaper today than for much of the recent past.

From my point of view, it would be a surprise to see the market spooked by this – it is natural that many products are taken off the market, but the financial sector is full of solutions.

For example, High Net Worth Individuals (HNWIs) are unlikely to be deterred from entering the market, assuming there continues to be a wide range of bespoke products available – a few percentage points here or there n won’t have much of an impact on demand.

Responding to Challenges

It will be the common industry refrain – variety. Higher base rates, with no clear indication of where they might peak over the next year or two, will lead lenders to a fiercer competitive plan.

The specialty finance sector is in good shape for the approaching conditions.

For many brokers and borrowers engaged in the sector, a significant part of the appeal has been the ability to offer bespoke products to suit individual circumstances – which the wider credit industry can often struggle to facilitate. .

Lenders accustomed to assessing applications based on narrow, tick-box criteria will struggle to keep pace with their clients’ increasingly disparate wealth structures and income streams as these heady times continue.

Much of the answer will come in the form of new products, of course. Longer-term solutions, more short-term loans and attractive refinancing options on existing products will be in high demand as investors and brokers seek the right package for their needs in a tough market.

Amidst all of this, it should be obvious that communication will be vital, whatever the shape of the market.

Existing borrowers will be concerned about the affordability of their loan and will certainly keep a close eye on their refixing date; while potential borrowers will need a slightly more personal touch to guide their way to the right product than they may have experienced for the better part of the past two decades.

As the veil of uncertainty hangs over the market, it is essential that lenders try to work closely – and fairly – with borrowers to ensure that the market remains active and progressing well.

Alpa Bhakta
Alpa Bhakta is the CEO of Butterfield Mortgages Limited, which is a premier London-based mortgage provider with a particular focus on the needs of UK and international HNWIs.

Butterfield Mortgages is authorized and regulated by the Financial Conduct Authority (FRN:119274).


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