Lloyds share price: what’s next as house prices fall for first time since 2012?

It's no secret that the UK's £70.4 billion mortgage market has been in dire straits in 2020. House buying and developer activity have ground to a halt as a result of Covid-19, while mortgage holidays and debt defaults have skyrocketed.

In spite of this, it still came as a shock to City analysts this morning when Nationwide Building Society released their much-anticipated market report, which revealed the grim news that UK house prices are due to experience a year-on-year fall for the first time since 2012.

Given that home buying and mortgages are a vital engine of the UK economy and one of its most dynamic sectors, this news does not bode well for any planned recovery. Among those who will be most concerned at this morning's news is Lloyds Banking Group, the UK's biggest mortgage lender with more than £42.5 billion of mortgage debt on its books.

Let's take a closer look at what the house price drop might mean for Lloyds' share price and the mortgage market more generally.

Lloyds share price set to face unprecedented turmoil

It's hardly as if Lloyds, one of the largest and most respected banking operations on the planet, was performing well prior to this morning's news. Before markets opened on Wednesday, Lloyds' share price had already dipped to a near-historic low of 30p and continued to drop as soon as the trading floors opened in London this morning.

Almost all of its recent turmoil can be pinned on the recent economic crisis. As the UK's largest mortgage lender, Lloyds has been particularly hard-hit by the wave of non-payments and defaults prompted by the shutdown of the economy.

Profits crashed 95% in April as toxic debts began to mount on Lloyds' balance sheets. Just two weeks ago, the UK Financial Conduct Authority (FCA) fined Lloyds £64 million over allegedly mistreating mortgage customers, accusing them of aggressively attempting to collect unpaid mortgage debts. This, in turn, prompted a further drop in share price, as Lloyds' most valuable asset, its reputation, took a beating.

Can the UK mortgage market recover in time?

What does the UK house price drop mean for Lloyds and other major FTSE-listed mortgage lenders? While there have been house price reductions in the UK in recent years, this is the first time in eight years that the entirety of the UK will post an annualized price drop. As mentioned, the property market has historically been one of the most dynamic sectors of the UK economy, proving vital to the post-recession economic recovery.

The fall in prices is likely indicative of an unprecedented collapse in demand, which will likely remove a major source of revenue for Lloyds and other major mortgage providers such as Royal Bank of Scotland (RBS) and HSBC. Mortgage products are arguably Lloyds' best-selling product, and there is little chance that sales will be revived in the year ahead.

In addition, economists have already pointed out that the drop we have already seen will likely get worse in the year ahead, especially as furlough schemes wrap up and mortgage defaults skyrocket. You do not need a photographic memory to recall how financial giants that seemed as unassailable as Lloyds once was, such as the Lehman Brothers, were brought down partly by toxic mortgage debt.

Lloyds has a much higher share of its resources invested in mortgages, meaning that it has more to worry about than RBS or HSBC. However, both banks will be looking nervously towards Lloyds in the coming months to see if they can drag themselves out of this deepening crisis.

How to trade UK bank stocks with IG

Looking to trade Lloyds and UK bank stocks? Open a live or demo account with IG and buy (long) or sell (short) shares using derivatives like CFDs and spread bets in a few easy steps:

1. Create an IG trading account or log in to your existing account
2. Enter ‘Lloyds Banking Group’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade