Read more: Housing and market forecasts for 2022 and 2023.

A return to moderate growth

Inevitably, the market in 2022 will soften compared to this year, as the stimulus to demand from the stamp duty holiday will no longer be a factor boosting house purchase. However, other Covid-19-triggered behavioural changes, most significantly the renaissance in homemover numbers following a decade of stagnation, are likely to provide continued impetus, compared to the broadly flat trend seen in the last few years immediately before the pandemic.

As we discuss in our Q3 Household Finance Review, homemover activity has been reinvigorated, after a decade of stagnation, by changing attitudes to working from home.  Initially to facilitate business continuity through the pandemic, remote working is now embedded in many businesses’ longer-term policies. The lack of a daily commute for many existing homeowners who were previously constrained by relatively low levels of equity with which to “staircase up” the housing ladder within the city where they work means they can now do so in a different location where their existing equity will go further.

Meanwhile, refinancing activity will pick up modestly next year but accelerate somewhat in 2023, as higher volumes of fixed rate deals, including five-year deals taken out in 2017, are set to end and the loans become eligible for refinancing.

Reflecting these patterns, gross lending overall will peak this year at £326bn and then fall back to £280 bn in 2022 (Chart 1).

Chart 1: Gross mortgage lending, £ billions

Source: Bank of England, UK Finance forecasts

As with last year, the economic and societal impacts of Covid-19 add a considerable degree of uncertainty to forecasts. In particular, there are downside risks - firstly from the labour market as the full unemployment picture following the end of the furlough scheme has yet to become fully clear. Additionally, rising inflation will put a squeeze on real incomes next year, and this will bear down on affordability as measured in income-expenditure assessments for mortgage applications.

Pressures on ongoing affordability will see arrears increase modestly

The same factors will place upwards pressure on ongoing mortgage affordability. However, a much-improved labour market outlook, compared to this time last year, means arrears are expected to rise only modestly, peaking at just over 100,000 cases in 2022 (Chart 2).

Chart 2: 1st charge mortgages in arrears¹

Source: UK Finance

Notes: 1. Arrears measured as those representing more than 2.5 per cent of outstanding mortgage balance

At the same time, possessions activity will increase gradually through 2022, as lenders work within the constrained capacity of the court system to clear a backlog of cases which were already in train before the pandemic but were delayed due to the moratorium, and now need to take place. However, we do not expect to see any material number of possessions arising from Covid-19-related payment problems until 2023 at the earliest (Chart 3).

Chart 3: 1st charge mortgage possessions

Source: UK Finance

Cautious optimism, but risks remain

Overall, the outlook for the housing and mortgage markets over the next two years is for a return to more stable, balanced growth following the upheavals of the last two years. Whilst risks remain, both to new lending and ongoing affordability, the market looks to be emerging from the pandemic in a better place than previously anticipated, supported by a much-improved wider economic outlook.