Anyone would think Lloyds Banking Group PLC (LSE:LLOY) would be poised to cash in on rising interest rates, as the UK’s leading mortgage provider by market share.
Lloyds holds about a fifth of the UK's mortgage lending portfolio, making it the clear market leader.
That’s why an internal memo sent this week indicating the bank’s intention to diversify away from mortgages, where it holds the biggest market share, is surprising, at least on the surface.
Until you look at what is happening with house prices. They have been rising astronomically this year, creating a growing disconnect with ever weakening consumer confidence.
The Financial Times reported that Lloyds is carrying out a reshuffle of its senior bench in line with a new focus on ‘customer affordability’.
Former mortgage director Stephen Noakes will leave the lender as part of the restructure, while consumer finance director Elyn Corfield will take the role as group director of business and commercial banking.
Clearly, if house prices fall within the near term as consumers fail to keep up with mortgage payments or struggle to afford rising mortgage rates, amid weakening consumer confidence, then it could present a problem for the bank’s mortgage business.
But that has not stopped contenders such as Barclays PLC (LSE:BARC), for example, increasing its residential mortgage lending book through this month’s acquisition of Kent-based mortgage lender Kensington Mortgages. Other contenders in the big five, such as Nationwide Building Society, Banco Santander (LSE:BNC) and NatWest Group PLC (LSE:NWG) could also pose challenges for Lloyds.
One of the biggest arguments for house prices being, on the one hand, about to fall, and on the other hand being unlikely to completely crash, is the origin of the price increases.
Analysts at investment bank Berenberg argue that house prices have risen in the past two years primarily due to people relocating following the Covid-19 pandemic, as a direct consequence of hybrid working, and not at the rates seen immediately prior to previous crashes.
They envision that any upcoming decline in house prices, as widely forecast in the second half of the year, will be caused by short-term factors such as rising mortgage rates linked to recent base rate increases, and that a crash will be narrowly averted as prices recover once fiscal tightening is eased.
The latest data from Nationwide shows that UK house prices are continuing to rise, but that the cost of homes in areas such as the south-west of England are rising at a higher rate than in London, in line with the online exodus theory.
Since the initial three months of 2020, average house prices in the UK capital have risen by 14.9%, compared with an average increase of 20% elsewhere in the country. The south-west had experienced a 27.7% surge in that time, followed by price surges in the Wales and the north-west.
Those prices are expected to drop later this year, but for how long?