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CHAPTER 1: INTRODUCTION

The housing market in the UK is in flux with the major mortgage lenders reporting a worrying trend following a boom in the mid-2021 for the mortgage growth. However, the mortgage growth has been stagnant since the end of 2021 and is especially worrying with the report for the closing of the second quarter of 2022. Barclays Plc has shown stagnation in its local lending, while the mortgage growth for NatWest Group Plc has seen a decline from £3.6 billion last quarter to £3.3 billion at the end of the June 2022 quarter (Shaw, 2022). On the other hand, Lloyds Banking Group has predicted the housing prices in the future to be falling. The following table shows the rise in the Barclays Plc’s mortgage growth since the onset of the pandemic. The unexpected rise of in the middle of 2021 is quite interesting because of its relationship with the decreased economic activity throughout the globe and rising inflation and interest levels.

The investigation conducted by EY (2022) shows contradiction to the Lloyds Banking group prediction as it shows that the property pricing will continue to rise to tackle the prospective market contraction that can result in a financial crisis. The EY Item club forecasts the average housing price to rise 26% since the start of the pandemic in the first quarter of 2020, which would raise it from £231,000 to £291,000 by the end of 2024. Peter Arnold, EY UK chief economist, argues that the prices would see a soft landing that will prevent market contraction as seen in the previous economic cycles. He also argued that the impact of the squeezed cost of living must not be overstated on the housing market, as the bulk of this effect is on those households that are not homeowners.

The chart below shows the mortgage lending growth in UK, which shows a marginal decline from the previous period which is in line with the decline seen in the NatWest Mortgage growth. The results shown are worrying with the expected stagnation of the mortgage prices and a squeeze in the housing market that must be dealt with careful policy initiatives.

In the presence of contradictory prediction, it become essential to investigate the matter with more details to forecast the effect of economic decline on the housing and mortgage market, including the answer to the question whether these mortgages will be recovered on maturity and the expected rate of default.

1.1.Problem statement

The impact of Covid-19 was so intense that it has changed the whole scenario of UK’s economy during 2020 and 2021. This has affected the lifestyle of the people very deeply and the housing market has also had a major blow. The renters in the country have failed to pay their rents (Aalbers, 2019) and have come to an edge of eviction (Bambino, Shah, Doubeni, Sia, & Wieland, 2020). The country’s supply of housing has been very weak already and due to the financial crisis, this has gotten worse (Besbris, 2020). On the other hand, the prices of the houses owned by people have also decreased and so has the number of houses for sale (Nanda, Thanos, Valtonen, Xu, & Zandieh, 2021). This has caused an enormous amount of distress among the working-class market because the people having a certain job can continue their job responsibilities by working at home but those employees whose work is labour-intensive have experienced high rates of job loss.

Every aspect of life has come under the effect of the pandemic. Moreover, the pandemic resulted in the loss of a substantial number of people, and its effects will have a very long-lasting effect. The enormous effect of Covid-19 on the employees’ turnover in the organizations in the UK and decreasing affordability of people shows that there will be a visible effect on the demand and supply of the housing facilities. Different research and analyses on the financial situations during the pandemic depict that inflation increased due to which different areas in the country experienced a decrease in spending (Chetty, Hendren, & Stepner, 2020). This has had major impact on the house market (Nanda, Thanos, Valtonen, Xu, & Zandieh, 2021). The decreased spare income has meant that the population at large has been unable to meet the mortgage payment for housing which has resulted in large scale refinancing of the mortgages or default in the payments altogether (Besbris, 2020). As such, it is imperative to assess the impact of the Covid-19 and contingent economic condition on the housing market and how these have affected the mortgage-holders’ ability to pay off mortgage and the implications it might have on the housing market going forward.

1.1.Background

As it is well known that affordable places to rent in the cities are very less in number as compared to the rural areas but as the days are progressing, same is the case with rural areas. Now the spending (on rent) of the people living in the rural areas is almost the same as that of the people living in the urban areas. Gone are the days when to save money, people used to live in less populated areas. The main issue in this regard is the slow increments in the income of the people and at the same time huge increases in the rents, which has made it difficult for the people to manage to live. The Covid-19 when it hit the World came with new challenges for the people. This worsens the problems that the citizens of the UK had regarding affordability, making many individuals lose their jobs………