Large decline in mortgage lending shows housing market on unsteady footing

The UK’s housing market looks still on unsteady footing in February, after the Bank of England revealed a notable drop in net mortgage lending to individuals, declining from £2.0 billion to £0.7 billion. This marks the lowest level of net borrowing since April 2016, when it also stood at £0.7 billion. However, this should come as no surprise considering mortgage approvals took a huge tumble in January.

But some green shoots might be appearing as in February approvals for house purchases showed a rebound, rising to 43,500 in February from 39,600 in January. This marked the first monthly increase since August 2022. However, the effective interest rate on newly drawn mortgages increased by 36 basis points to 4.24% in February, making borrowing more expensive for potential homeowners and will likely still continue to mean approvals are depressed as people adopt a wait and see approach at least in the short term. However, it’s clear that home buyers are cautiously returning back to the market in early 2023 after the huge shocks at the back end of last year made many put their house hunts on ice.

How this all feeds through to house prices is yet to be seen. At present we have seen a few minor drops in prices but they have remailed relatively resilient as of yet. How prices progress towards the end of the year will depend on how volatile the economy is, the speed at which inflation comes down and how much further the Bank of England go with interest rate increases.

Consumer credit also positively witnessed a decrease in February, with consumers borrowing £1.4 billion on net, compared to £1.7 billion in January. The borrowing was split between £0.6 billion on credit cards and £0.8 billion through other forms of consumer credit. Any decrease in credit considering the eye watering interest rates many will be suffering is good news but anyone borrowing for day to day needs in this environment may find that they quickly spiral into debt.

Cost of living pressures cause house prices to run out of momentum

The latest Nationwide figures reveal that house prices have recorded their seventh consecutive monthly decline in March, with an annual decline of 3.1% - the largest since July 2009.

All regions saw a slowing in price growth in Q1, with most seeing small year-on-year falls. Some more positive news for the housing market this week, came from the Bank of England, which showed that mortgage approvals were slightly up potentially pointing to more people entering the market which should shore up prices. But this is still subdued as the number of mortgages approved for house purchase went up to 43,500 cases in February, almost 40% below the level prevailing a year ago.

However, it’s important to look at the wider economic backdrop before making predictions as at present at best house prices are likely to stagnate due to the cost of living pressures impacting the nation. With weak consumer confidence and stretched affordability, it will be hard for the market to regain much momentum in the near term. Furthermore, household budgets remain under pressure from high inflation, and housing affordability remains stretched as mortgage rates remain well above the lows prevailing at this point last year. When the Bank of England starts to reduce interest rates and inflation returns to more normal levels we may again see demand pick up as mortgage costs become more affordable.

The housing market's a hot topic  but our advisers are well placed to guide you through it. Gary Cosgrove is our senior mortgage advisor and Daniel Bailey is a qualified member of the Society of Mortgage Professionals. Feel free to get in touch with them at anytime.

Source: The latest figures from the housing market (quilterfp.co.uk)