Housing market under pressure as mortgage approvals reach 8 month low - EY ITEM Club comments

26 June 2017

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  • UK housing market stumbles further as British Bankers’ Association (BBA) reports mortgage approvals at 8-month low in May
  • Housing market under pressure from increasingly squeezed consumers and heightened caution over engaging in major transactions
  • House prices look unlikely to rise by any more than 2% over 2017, and the downside risks to this already muted outlook are rising
  • The BBA also reported an easing back in consumer credit growth to a 19-month low in May, which ties in with weakened retail sales during the month

Howard Archer, Chief Economic Advisor to the EY ITEM Club, comments:
“There’s no let-up in the evidence of housing market activity being pressurised, with the BBA reporting that mortgage approvals for house purchases slowed for a fourth successive month in May at an eight-month low. At 40,347 in May, mortgage approvals were 9% below January’s peak level of 44,327.

“Stuttering housing market activity has recently been weighing down on house prices. May data from the Halifax showed annual house price inflation at a four-year low of 3.3% in the three months to May, while it was at a 35-month low of 2.1% on the Nationwide measure.

“The fundamentals for house buyers could deteriorate further over the coming months with consumers’ purchasing power squeezed even more by a combination of higher inflation and muted earnings growth. It is also possible that the labour market will increasingly falter despite its current resilience. Additionally, housing market activity is likely to be hampered by soft consumer confidence and reduced willingness to engage in major transactions.

“Potential house buyers may also be concerned by signs that the Bank of England could be near to hiking interest rates. While any increase in interest rates would be small and mortgage rates would still be at historically low levels, the fact that it would be the first rise in interest rates since mid-2007 could have a significant effect on housing market psychology. 

“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 reached 5.81 in December (the highest level since August 2007) and was still as high as 5.75 in May. This is well above the long-term (1983-2017) average of 4.19. However the downside for house prices should be limited markedly by the shortage of houses for sale.” 

Easing back in consumer credit growth ties in with weakened retail sales during the month

“At 5.1% the growth rate in consumer credit was the lowest since October 2015 - down from 6.4% in April and its peak of 7.2% in October 2016.

“This will be of some relief to the Bank of England. It may well be that heightened uncertainties over the outlook and increased concerns over personal finances are encouraging some consumers to be more cautious in their borrowing. However, the squeeze on consumer purchasing power may also increase the need for some consumers to borrow.”