UK mortgage growth to hit post-Financial Crisis lows in 2023

UK mortgage growth to hit post-Financial Crisis lows in 2023

Anna Anthony

UK mortgage lending is expected to fall slow sharply in 2023 with just 0.7% growth due to rising mortgage rates and falling real household incomes, according to the latest EY ITEM Club Outlook for Financial Services.

This comes after lending is projected to rise 4% this year, following strong demand in the first half of the year. The drop to 0.7% would be the lowest rate of mortgage growth since 2011 amid the aftermath of the financial crisis.

As market demand wanes, banks are also expected to tighten their lending criteria as they contend with higher interest rates, a riskier economic outlook and volatility in markets.

On consumer credit, the forecast is for significant growth this year, at a rate of 7.2%, as cost of living and inflationary pressures deepen. This high rate is not expected to be sustained, and as inflation falls back and the squeeze on households’ real incomes eases, the growth rate is predicted to slow to 5.1% in 2023.

While a return to growth for business lending is forecast this year (2.2%), levels remain low by pre-pandemic standards. Looking to 2023, a net fall of 3.5% is forecast as businesses’ appetite and ability to borrow is affected by the deteriorating economic outlook, rising borrowing costs and an overhang of debt from the pandemic.

Anna Anthony, UK financial services managing partner at EY, comments: “Geopolitics and the worsening economic environment are having a significant impact on households and businesses. While interest rates are still fairly low by historic standards, they are the highest they’ve been in a decade and are set to rise further.

“This will put further pressure on already-strained finances and will have a knock-on effect on demand for most forms of bank lending next year, as potential homeowners postpone purchases and businesses pause investment.

“Affordability is stretched and mortgage and business lending are likely to slow to a rate similar to that seen post-financial crisis. The key difference now is that tighter regulation and higher solvency levels mean banks are well capitalised and far more able to support customers through this challenging period.

Ms Anthony continued: “Another crucial difference is that many consumers are entering this period with a financial cushion in the form of savings built up during the pandemic, and businesses that took out government-guaranteed loan schemes during COVID-19 remain on fixed rate terms at relatively low interest rates. This all means that consumers and businesses are better positioned than they were over a decade ago, and the banks better able to support them.”

Homeowners keen to lock-in low rate mortgage deals but demand set to fall in 2023 as rates rise

Overall housing market activity has remained fairly buoyant this year, in part as buyers looked to lock-in low rate deals, with mortgage lending forecast to grow 4% during 2022 (£63 billionn in net terms). However, rising interest and mortgage rates, combined with the growing financial strain on households as real incomes are set for the biggest annual decline since the 1970s, will mean growth will slow significantly. In 2023 mortgage lending is forecast to grow just 0.7% (£11bn) with slightly higher growth of 1.4% forecast in 2024.

Consumer credit set to climb 7.2% this year as cost of living pressures worsen

Demand for consumer credit is expected to rise this year by just over 7% (equating to £14bn in net terms). This is a reversal of the trend in 2020 and 2021, when consumer credit fell by over 10% amid the pandemic. This growth reflects inflationary pressures compelling households to make more use of loans and credit cards to support spending and a recovery in some forms of discretionary spend, such as foreign holidays.

Further growth is still expected in 2023 as cost-of-living pressures continue – forecast at 5.1% (£11bn) – but government action to help mitigate the financial squeeze on households and a gradual fall in inflation will start to ease those pressures.

The cap on household energy bills means that CPI inflation is expected to peak at under 11% this autumn, rather than the 14%-15% that had been in prospect prior to the cap. In addition, the cuts in National Insurance Contributions due in November will boost households’ resources. In 2024, lending growth is expected to fall a little further to 4.2% as inflation falls back and there’s a recovery in real household incomes, which reduces the need for credit.

Ms Anthony concluded: “Despite the weakening and uncertain economic picture, UK financial services firms will continue to provide strong support to consumers, businesses and the wider economy, just as it did through the pandemic. While the sector continues to face challenges, it remains a leading force on the world stage as it forges its post-Brexit path, with sustainability, digital innovation and strong governance at its heart.”

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