Arrears to rise when policy support is withdrawn - Capital Economics
UK Housing

Arrears to rise when policy support is withdrawn

UK Housing Market Update
Written by Andrew Wishart

Mortgage arrears have remained very low, casting doubt on our view that we will see a substantial rise in forced selling later this year. But new evidence from the Resolution Foundation shows that policy support remains crucial to households keeping up their repayments, so we continue to think that arrears will rise when policy support is eventually withdrawn.

  • Mortgage arrears have remained very low, casting doubt on our view that we will see a substantial rise in forced selling later this year. But new evidence from the Resolution Foundation shows that policy support remains crucial to households keeping up their repayments, so we continue to think that arrears will rise when policy support is eventually withdrawn.
  • The mood music from the timeliest housing market data has been upbeat, even though prospective buyers now have little chance of benefitting from the stamp duty holiday. And some of the negative factors that underpin our below-consensus forecast have not yet materialised. For instance, the number of mortgages in arrears only rose marginally from 80,250 in 2020 Q3 to 83,250 in Q4, about 0.8% of all mortgages, despite a substantial rise in unemployment over the same period. (See Chart 1.)
  • We have previously pointed out how the drop in employment has disproportionately affected renters rather than owner occupiers. (See here.) Indeed, regular mortgage repayments recovered to their pre-virus level by the end of last year, suggesting that most borrowers who took payment holidays did so as a precaution. Alongside low arrears, that begs the question whether the disparity between the impact of the pandemic on renters and owner occupiers is so wide that very few households will be unable to keep up their repayments?
  • A new survey commissioned by the Resolution Foundation shows that policy support remains critical in preventing arrears. According to the Foundation’s survey the vast majority of borrowers who took a mortgage payment holiday have now resumed repayments, but 1% were still on a payment break at the end of January.
  • And the survey suggests that many more borrowers are using the furlough scheme, so there is a risk that the skew of job losses towards renters will not be sustained when the scheme is eventually withdrawn. Whereas owner occupiers have been less hard hit by the rise in unemployment so far, the Foundation found that 5% were on furlough in January. (See Chart 2.) As a result, the risk is that the further rise in unemployment we expect when the scheme ends is not so skewed towards renters, and arrears rise.
  • Of course, alongside the roadmap out of lockdown, the Prime Minister hinted that the furlough scheme will be extended for as long as restrictions are in place. But even if the end of the scheme is delayed from April to June, given we think that GDP would still be 4% below its pre-pandemic level at that point, we would expect the end of the scheme to cause the unemployment rate to increase to 6.5%. (See Chart 1 again.)
  • The upshot is that the housing market will still have to contend with an increase in arrears and forced selling after the furlough scheme ends. But stronger buyer demand than we anticipated due to the change in housing preferences and the fact that many high-income households have fared well financially during the pandemic may partly offset the impact on prices.

Chart 1: Unemployment Rate & Arrears

Chart 2: Job Losses & Furloughed Employees by Tenancy (%)

Sources: UK Finance, Refinitiv

Source: Resolution Foundation


Andrew Wishart, Property Economist, +44 (0)7427 682 411, andrew.wishart@capitaleconomics.com