The Bank of England’s decision to raise interest rates is expected to lead to a downturn in the UK housing market. Photograph: Blo
British banks approved the fewest mortgages for house purchases in more than a year in October, with economists warning the decline could signal the start of a downturn in the UK housing market.
Mortgage approvals fell to a 13-month low of 40,488 last month, down from 41,576 in September, according to the industry trade body UK Finance.
Samuel Tombs, the chief UK economist at consultancy Pantheon Macroeconomics, said the Bank of England’s decision earlier this month to raise interest rates for the first time in more than a decade, to 0.5% from 0.25%, would probably exacerbate the downward trend.
“This appears to be just the start of a bigger downturn,” Tombs said. “Housing market activity likely has cooled further in recent weeks, given that mortgage rates have moved swiftly higher and consumer confidence has weakened since the hike by the Bank of England’s monetary policy committee.”
The chancellor’s decision to cut stamp duty for first-time buyers would do little to counter this downturn, primarily because it is expected to push up house prices, Tombs said.
Howard Archer, the chief economic adviser to the forecasting group EY Item Club, said the mortgage approval figures were the latest evidence of “lacklustre housing market activity”, after new buyer enquiries fell in October at their fastest pace since July 2016, according to the Royal Institution of Chartered Surveyors.
He said cash-strapped consumers were reluctant to commit to major purchases at a time when real pay was falling, as shop prices rise faster than wages.
“It is also very possible that the recent Bank of England interest rate hike will weigh down on housing market activity,” Archer added. “While the increase in interest rates was just 0.25% and mortgage rates are still at historically very low levels, it could have a significant effect on housing market psychology.”
EY Item Club is forecasting house price growth of about 2-3% in 2018, underpinned by a shortage of homes for sale, high employment, and mortgage interest rates that remain historically low.
It was a different story for existing homeowners, who rushed to remortgage in October, before the Bank’s highly anticipated rate rise in November. There were 34,036 loans approved for remortgaging last month, according to UK Finance. That was up by 11.6% compared with September, and 37% higher than at the same point last year.
“The anticipated bank rate rise saw a flurry of remortgage activity as many homeowners took advantage of the competitive rates on offer,” said Mohammad Jamei, the trade body’s senior economist.
Annual growth in credit card lending slowed to 5.1% in October from 5.5% in September.
Meanwhile, non-financial businesses repaid a net £1.5bn of debt last month, the largest since February, in a sign that businesses are becoming more cautious about investing when the outcome of Brexit negotiations is far from clear.
“In terms of saving, consumer deposits grew at a slower rate in October, while businesses have continued the trend of bolstering their cash reserves amidst a cautious business landscape due to Brexit uncertainties,” Jamei said.