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Mortgage lending is expected to record decade-low growth in 2023 and 2024, according to the latest EY ITEM Club Outlook for Financial Services, as mortgage rates reach their highest since 2008, economic growth remains subdued and weakening housing market sentiment drives down demand. Overall, mortgage loans in 2023 are expected to rise just 1.5% (net) and 2% (net) in 2024, representing the slowest growth in ten years.
Across the UK economy, sustained headwinds from high interest rates and inflation, and a weaker-than-anticipated labour market are expected to continue driving sluggish GDP growth for the remainder of 2023 and into 2024. In addition, developments in the Middle East and the ongoing war in Ukraine present an ongoing downside risk to the forecast, with a very real potential of further falls in consumer and business confidence and appetite to borrow, at least in the short-term.
Anna Anthony, UK Financial Services Managing Partner at EY said “The UK is still on track to avoid recession this year, but the economic environment remains challenging. Significant cost of living pressures continue to affect households’ ability to spend, and an increasing number are finding it difficult to keep up with loan repayments. At the same time, businesses’ appetite to borrow and invest has been affected by high borrowing rates. This slowdown in the flow of capital is being felt across the country; from individuals pulling back on daily expenses and putting off home-buying plans, through to banks and asset managers managing low growth portfolios.”
“Escalating geopolitical tensions around the world are another cause for concern, and it will be prudent for financial institutions to be prepared for further dips in consumer and business confidence, and to ensure they are doing all they can to support customers through these challenging times.”
Total UK bank loans are expected to rise by only 1.5% this year – a minor upgrade from a 1.2% forecast in May, but significantly lower than the 3.3% averaged during the pre-pandemic years of 2015-2019. Gradual pick-up in growth is expected in 2024 (2.3%) and 2025 (3.2%).
Subdued housing market sentiment and higher borrowing costs has led net mortgage lending to average just £0.3bn per month from January to September 2023. This compares to £5.7bn in same period in 2022, at a time when mortgage approvals were around 40% higher. The forecast of 1.5% growth for 2023 is the weakest since 2011.
The EY ITEM Club expects mortgage demand to pick up over 2024 and 2025 provided inflation continues to fall, the Bank of England cuts interest rates next year, and housing affordability improves. Overall, mortgage lending is forecast to grow 2% next year and 2.8% in 2025. These figures remain very low in historical terms and sit far below the 3% averaged during the pre-pandemic years of 2015-2019.
Net unsecured lending is forecast to rise 6.1% in 2023, which is the strongest growth since 2017, in part driven by a fall in repayments in recent months. The EY ITEM Club predicts unsecured lending growth will slow to 5% in 2024 and 4.3% in 2025.