Lloyds raises house price expectations despite mortgage woes

Lloyds Banking Group has issued a slightly more positive house price outlook despite warning of increased pressure on mortgage affordability from higher inflation and interest rates.

A half-year update from the UK’s largest mortgage lender updated its assumptions on house price growth.

The lender still expects average house prices to drop this year, with a base case scenario of a 5.4% decline.

That compares with predictions of 6.9% in December.

Its most severe downside scenario in December predicted a 14.8% drop for 2023 but this has been reduced to a 9.3% decline.

The update said the most probable scenario is a 5.6% drop this year and a 1.1% average decline over the next four years.

In December, Lloyds predicted the most probable decline would be 7.7% with average growth over four years of 1.2%.

Lloyds said in the update that it has made a £700m provision for bad loans, warning there is “modest evidence of credit deterioration” in its mortgage portfolio.

It said increases in arrears and defaults that have emerged are mainly driven by variable-rate customers, who have experienced material increases in their monthly payment. 

This has pushed its expected credit loss for mortgages up from £1.2bn in December 2022 to £1.3bn as of June 2023.

Lloyds said there remains a “potential risk to affordability” from continued inflationary pressures combined with higher interest rates that may not be covered by its credit loss models.

The bank said: “This risk is to customers maturing from low fixed rate deals, the building impact on variable rate product holders, lower levels of real household income and rental cover value.”

Lloyds added that the level of risk is mitigated from affordability assessments made when borrowers took out their mortgages.