UK mortgage approvals have plummeted to a six-month low, influenced by persistently high interest rates. This trend highlights the ongoing challenges prospective homebuyers face in the current financial climate.
According to the Bank of England, the number of mortgage approvals in June dropped below analysts’ expectations, falling to 59,976. Meanwhile, the high borrowing costs remain a significant deterrent for many potential buyers.
UK Mortgage Approvals Drop to Six-Month Low
Mortgage approvals in the UK have fallen to their lowest level since January. According to data from the Bank of England, high interest rates continue to dampen housing market activity.
In June, the number of mortgage approvals dropped to 59,976, down from 60,134 in May. This figure was below analysts’ expectations, although it was still above the 2023 monthly average of 48,000. High borrowing costs are clearly a deterrent for potential homebuyers.
Impact of High Interest Rates
The effective interest rate on newly drawn mortgages rose to 4.82%, while the rate on all mortgages increased to 3.65%. This hike in rates has discouraged many would-be buyers from entering the property market.
There is a hope that the central bank will lower the UK’s base interest rate for the first time in four years. Current rates are at 5.25%, a 16-year high. If reduced, this could lead mortgage providers to lower their rates as well.
In anticipation of possible rate cuts, some high street lenders have already started reducing their rates. Nationwide, for example, began offering products with rates below 4% for the first time since February.
Expert Opinions and Predictions
Rob Wood, the chief UK economist at Pantheon Macroeconomics, expects mortgage approvals to improve in the second half of the year. He predicts they will reach 65,000 as mortgage interest rates fall in response to potential Bank of England interest rate cuts.
Wood also noted that lump-sum mortgage repayments eased to £1.2 billion in June, the lowest amount seen since January 2016. This suggests that consumer anxieties about rising interest rates may be diminishing.
Gross lending in June was £20.8 billion, surpassing the £18.7 billion in repayments made that month. This indicates a slight increase in borrowing activity despite high interest rates.
Inflation and Economic Growth
Members of the Bank’s monetary policy committee have pointed out that services inflation remains high. This may persuade them to maintain rates for an eighth consecutive meeting.
However, services inflation did slightly decrease to 5.7% last month. This small drop could give some hope to those looking for a reduction in interest rates.
Ashley Webb, a UK economist at Capital Economics, suggested that steadily rising mortgage rates since February could result in stagnant housing market activity and little change in property prices for the rest of the year.
House Prices and Consumer Behaviour
The Office for National Statistics revealed that house prices increased by 2.2% to £285,000 in the 12 months leading up to May. This rise is modest given the high interest rates.
The Bank’s research also suggests that people are cautious about increasing their borrowing. Credit card spending dropped to £500 million in June from £600 million in May.
Weak retail sales are likely a contributing factor, with sales falling by 1.2% that month. Overall, consumer borrowing totalled £1.2 billion, down from £1.5 billion in May and below analysts’ expectations of £1.3 billion.
Savings and Economic Constraints
In June, households added £8.4 billion to savings accounts, up from £6.5 billion the previous month, continuing a recent trend of increased savings.
Economic growth has been constrained by people saving more of their income compared to recent years. This trend is reflected in poor consumer spending figures.
As more income is directed towards savings, less is available for spending, which has led to sluggish economic growth in the UK.
In conclusion, the UK housing market is undeniably impacted by high borrowing costs, which have led to a significant drop in mortgage approvals. The anticipation of potential interest rate cuts in the near future could stimulate some activity, although current conditions remain challenging for homebuyers.
As economists and banking experts suggest, any improvement in housing market activity will heavily depend on the central bank’s decisions regarding interest rates. Meanwhile, consumers’ cautious borrowing behaviour and increased savings are contributing to a sluggish economic growth.
The broader economic context, including high inflation and constrained economic growth, further complicates the housing market. Therefore, it remains a complex environment for buyers and lenders alike, with the future of mortgage approvals hinging on central bank policies and broader economic conditions.