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Lloyds shares: Could higher rates in 2023 boost mortgage lenders?

By David Burrows

11:03, 20 December 2022

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LLOY
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Lloyds Bank in London. Photo: Getty
Lloyds Bank in London. Photo: Getty

How will the housing market shape up in 2023? Will there be a crash, and how would it impact mortgage lenders – such as Lloyds (LLOY), which has the biggest mortgage book of all the UK banks?

Ben Yearsley, Investment Consultant, Fairview Investing sees tough times ahead but thinks a ‘crash’ might be overstating things.

“I'm not sure crash is the right word but I can't see how prices won't fall. Base rates have gone from zero to above 3%. Mortgage rates have gone from sub 2% to above 5 % in some cases and banks have been restricting mortgage availability. Also add in some buy to let landlords selling up as well.”

He continues: “The flipside and why I think prices will fall but not crash is the amount of mortgages on fixed rates. This means no impact yet on affordability for many and also unemployment remains low.”

So what about the prospects for Lloyds and other high street lenders?

You might expect Lloyds to perform stronger when there are high interest rates. But it has underperformed the FTSE 100 this year and is some way from the 55p level of mid- January 2022 – the current price is around the 45p mark.  

Investors may be worried that Lloyds share price may drop further in 2023, however it has a healthy balance sheet and should be able to cover bad debts comfortably.

Lloyds Banking Group share price chart

Yearsley agrees with this scenario. “I don't think banks are in bad shape. They've already been putting reserves away and capital ratios are high. It's probably going to be tougher for housebuilding though.”

Danni Hewson, financial analyst at AJ Bell echoes this view but argues that banks like Lloyds with massive mortgage books will need to work with their customers to avoid defaults and if inflation lingers longer than current predictions things could get worse pretty quickly.

She agrees with Yearsley that housebuilders will face challenges in 2023 but it should not be catastrophic.   

“For housebuilders falling sale prices should be offset by falling material costs and with the whole demand supply equation still well out of kilter the housing market isn’t expected to be extinguished entirely.”

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Interest rate moves

Of course, no one has a crystal ball and history shows that estimates of inflation, interest rates and unemployment can often be significantly off-track in reality.  

Given the uncertainty right now (both economic and geopolitical) – best and worst case scenarios are quite broad in terms of where we might be in 12 months’ time.  

Laith Khalaf, head of investment analysis at AJ Bell, thinks interest rates will go up from here but that things will start to steady.  

“A year ago, the Bank of England base rate stood at just 0.1%, keeping down the costs of mortgages and loans, and helping to grease the wheels of the economy.

“Today the base rate is 3.5%, and that is gradually going to become front and centre of the consumer crunch, as the impact of higher interest rates gradually ripple out into the real economy.”

Khalaf points out that in its latest commentary the Bank didn’t choose to take issue with market expectations for future interest rates, which suggests these are now more in tune with what policymakers are thinking, namely a peak of around 4.5% next summer.

“Clearly there are lots of factors which can move the interest rate peak up or down, but for now 4.5% looks a reasonable working assumption,” he says.

Hewson believes the events of the past year have poured a great big bucket of water over what had been a sizzling UK housing market and 2023 is expected to see prices fall and repossessions to rise.

“Thankfully, fixed rate mortgage deals have fallen somewhat as the spectre of the 'mini budget' was consigned to the rubbish bin and with interest rates now expected to peak well below earlier expectation the doomsday scenario of a collapse not seen since the financial crisis is likely to be avoided.”

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