UK mortgage market hits seven month high - BoE

Mortgage approvals remain relatively sluggish despite loans for house purchases hitting a seven-month high in August, new data from the Bank of England has revealed.

Year-on-year, mortgage approvals were down marginally in August and were 18.1 per cent below their long-term (1993-2018) average of 81,137.

The overall impression remains that the housing market is finding it hard to really step up a gear - although there are varying performances across the regions with the overall national picture dragged down by the poor performance in London and parts of the South East.

Consumer caution over making house purchases may well also be magnified, in the near term at least, by heightened uncertainties over Brexit.

Potential house buyers may also be concerned about the potential for further interest rate hikes over the medium term.

The Bank of England also reported that year-on-year consumer credit growth slowed in August to be at the weakest level since September 2015. Annual growth in consumer credit was 8.1 per cent in August, down from a peak of 10.9 per cent in November 2016.

It may be that August’s rise in interest rates fuelled consumer caution over borrowing. Both lenders and consumers will need to take into consideration that the Bank of England is likely to raise interest rates further over the medium term.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “We expect that house price gains over 2018 will be limited to around 2.5 per cent. At this stage, we expect a similar rise (around 2.5 per cent) in 2019.

“The fundamentals for house buyers are likely to remain challenging – and they were not helped by the Bank of England hiking interest rates to 0.75 per cent in August, even though the share of outstanding mortgages on variable interest rates has fallen to a record low of around 35 per cent, which is half the peak level of 70 per cent in 2001.

“Consumers have faced an extended serious squeeze on purchasing power, which is only gradually easing. Additionally, housing market activity remains hampered by relatively fragile consumer confidence and a limited willingness to engage in major transactions. Indeed, consumer confidence weakened in September. Caution over making major purchases may well be magnified in the near term at least by current heightened uncertainties over Brexit.

“House buyers will also likely be concerned about further interest rate hikes over the coming months – even if they are likely to be gradual and limited.

“Housing market activity and prices are also likely to be pressurised by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house price to earnings ratio stood at 5.69 in August, which is well above the long-term (1983-2018) average of 4.26. Furthermore, mortgage lenders have been tightening their lending standards amid pressure from the Bank of England.

“The downside for house prices should be limited by the shortage of houses for sale. High and currently rising employment is also supportive for the housing market while mortgage interest rates are still at historically low levels and still will be even if the Bank of England does raise interest rates gradually.”