Major lender warns of 25% house price drop in ‘downside scenario’

House prices could drop by almost 25% ‘start-to-trough’ or by as much as 40% in severe circumstances, Lloyds Banking Group has claimed.

The lender made the dire predictions in its latest annual report, which highlighted pressures on affordability from rising interest rates and the cost of living crisis.

Revealing its scenario planning as of the end of 2022 and the allowances it is making for expected credit losses, Lloyds said its base case forecast is a 6.9% drop in house prices this year followed by a 1.2% decline in 2024 before prices rise by 2.9% in 2025 and 4.4% in 2026.

It is anticipating a ‘start-to-trough’ drop of 6.3% as its base case, which will inform its mortgage lending and housing market activity.

This is significant as Lloyds is the UK’s largest mortgage lender so that could have an impact on mortgage approvals and buyer demand.

The bank’s downside scenario is an 11.1% drop this year followed by falls of 9.8% in 2024, 5.6% in 2025 and 1.5% in 2026, with a ‘start-to-trough drop of 24.3%.

It also has a severe downside of a 14.8% house price drop this year and 40.1% decline from ‘start-to-trough.’
 

There is something for the optimists though, with the brand’s upside scenario suggesting a 2.8% drop this year, 6.5% growth in 2024, 9% in 2025 and 8% in 2026, with an overall drop of 1.1%.

Lloyds Bank said: “Although inflation will begin to fall from early 2023, this is expected to be gradual, causing a further decline in households’ spending power, dragging down UK GDP by 1.2%.

“With UK bank rate expected to be 4% through most of the year, house prices are forecast to fall by 7 per cent across 2023 with mortgage affordability for new buyers at its tightest since pre-2009. 

“There are significant risks to these forecasts in both directions – the impact of rising interest rates could weaken the global or UK economy more than expected.
“Conversely, the cost of living squeeze may be not as deep as assumed if recent falls in wholesale-market forward energy prices persist.”

The annual report warned that a mild recession and falling property prices “are expected to reduce growth in most of our markets in 2023.”

It said: “Mortgages are expected to slow the most, as higher interest rates drive down housing transactions.”

https://www.lloydsbankinggroup.com/assets/pdfs/investors/financial-performance/lloyds-banking-group-plc/2022/full-year/2022-lbg-annual-report.pdf