Market challenges taking their toll on mortgage activity

1st September 2023

With interest rates still remaining high, EY ITEM Club has predicted that the housing market will remain sluggish for the foreseeable future.

EY Item Club says that the step-down in an already weak housing market activity in July probably reflected early summer’s challenges for the mortgage market. Rates have retreated recently as markets rein back expectations of further action by the Bank of England.

Although July saw households take on less unsecured debt than the previous month in net terms, gross lending showed more resilience. Households also added less to their liquid savings, but just how much support dissaving will offer to consumer spending remains hard to gauge.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, said “The effect of early-June’s rise in mortgage rates, following upside surprises for inflation and pay growth, became clearer in July’s mortgage activity. Approvals for house purchases fell to 49,444 from June’s 54,605. This was the lowest since February and almost 22% down on a year earlier. Net mortgage lending rose slightly, but the increase of £0.2bn was marginal and disguised a sizeable fall in gross home loans to £18.7bn from £20.4bn in June.”

“The fact that market interest rates have started to retreat following signs that the economy is weakening should take some of the pressure off weak mortgage demand. But while swap rates are lower than their early-July peaks, they are still well above the levels seen in early summer. And the scale of the recent rise in interest rates – the average interest rate on a new mortgage rose to 4.66% in July, 233bps higher than a year earlier – means housing market activity seems destined to remain sluggish for the foreseeable future.”

“On the face of it, unsecured lending in July showed signs of fragility. Net lending of £1.2bn was a fall from June’s £1.6bn and below the £1.5bn averaged over the previous six months. However, gross lending rose slightly, with repayments increasing by more. And while households added to cash in bank deposits, the increase of £0.4bn was down on June’s £3.8bn. But with the savings data volatile and the consequences of higher mortgage rates for homeowners growing, the EY ITEM Club thinks that dissaving may offer only limited support to consumer spending.”