Bedlam in Britain's 1.5 trillion-pound ($1.9 trillion) mortgage market, fuelled by ructions in money markets, threatens to trigger a renewed slump in housing activity and financial pain for homeowners on a par with the late 1980s.
Lenders have repeatedly re-priced and pulled home loan offerings in recent weeks in a scramble to keep up with soaring funding costs, spurred by expectations for more interest rate hikes from the Bank of England as it battles stubbornly high inflation.
It's not just prospective home buyers and sellers who are worried, but also existing mortgage holders who face eye-watering increases in repayments when their fixed-term deals expire.
"Anxiety is at a high level," one of Britain's most senior bankers' said, pointing to the instability in product rates and availability which have made it harder for both lenders and borrowers to do their sums.
"It's the anxiety that this creates that causes longer damage," the banker said.
Investors are waiting to see how badly this will hurt housing market activity, which recovered in early 2023 from the autumn turmoil triggered by the "mini-budget" economic agenda of former prime minister Liz Truss.
The housing market has totemic importance in Britain's consumption-driven economy and is closely linked to consumer confidence.
"We're firmly focused on supporting customers through current pressures and providing access to good deals. However, over recent days cost of funds has increased and, like other banks, we have had to reflect that in our mortgage rates," HSBC said in a statement.
The average mortgage rate on new two-year mortgage deals rose on Wednesday to 5.90%, according to property data provider Moneyfacts - the highest since December last year, in the aftermath of the mini-budget.
At 6%, homeowners would face the same financial burden from repayments as they did in the late 1980s, even though mortgage rates were around 13% then, according to housing market analyst Neal Hudson, founder of consultancy BuiltPlace.
Hudson's analysis takes into account the fact that mortgagors today borrow much greater sums against their income - a ratio that has risen from 2.0 in the late eighties to around 3.5 today - in addition to tax and loan product changes.
"It takes a far lower mortgage rate to create the same amount of financial stress in terms of repayments as a double-digit mortgage rate did back in previous periods," Hudson said.
STRESS
The question now is how mortgage market stress will feed through into the real economy.
Two-year swap rates - a key determinant of mortgage borrowing costs - have soared by 95 basis points over the last two months.
Historically, increases of 85 basis points or more have presaged large annual declines in housing starts in subsequent quarters - as happened when swap rates spiked in 1989, 1994 and 2008, according to a Reuters analysis.
Jamie Lennox, director at broker Dimora Mortgages, said there was "no end in sight" for the trouble in the mortgage market.
"This is not the news the hundreds of thousands of homeowners will want to hear and will send shivers down their spine," he said.
Financial markets fully price in the BoE's Bank Rate rising to 5.75% from 4.5% now, within touching distance of the 6% mark used by the BoE last year in its stress testing of major financial institutions - a fact not lost on banking executives.
Senior bankers say they want to lend through the storm, and are repricing mortgage products as quickly as possible to stay open for business.
But product rates have to move in sync with the swap curve, which reflects the market price of the money they then lend out, with a margin laid on top.
Borrowers therefore should expect volatility in mortgage prices until swap rates start to fall, those bankers say, and there can be no certainty in when that might begin until policymakers achieve greater control over inflation.
While that fight rages, lenders also need to ramp up due diligence to ensure borrowers can comfortably afford to repay loans at more expensive rates, to avoid falling foul of consumer protection regulation and minimise risk of future loan defaults.
The BoE stresses that this is not a repeat of the 2007-09 financial crisis, with banks today far better capitalised - which in theory means they can keep the supply of credit open through tougher economic conditions.
RECESSION?
So far, British households have proven surprisingly resilient to sharp hikes in the prices of everyday goods and the rapid rise in interest rates that have lifted the cost of mortgage loans, credit cards and other finance.
Most bankers attribute this strength to large savings accumulated during pandemic lockdowns but with inflation holding at historically high levels, Britons are once again using credit to support lifestyle spending habits like travel and entertainment.
"The long and short of it is that a large number of households face a stark increase in their mortgages payments over the course of the year," Philip Shaw, chief economist at Investec, told Reuters.
"In aggregate what is expected is a material slowdown in spending, that's why we're suggesting why the economy is likely to fall into a mild recession, largely because of that," he added.
The consensus from the Reuters poll published on Wednesday suggested Britain should dodge recession, but with weak growth instead.
