Press release

2 Mar 2020 London, GB

Mortgage approvals jump up to highest level since February 2016

The Bank of England reported that mortgage approvals for house purchases rose markedly in January to the highest level since February 2016

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  • The Bank of England reported that mortgage approvals for house purchases rose markedly in January to the highest level since February 2016
  • The data fuels the view that the housing market has, at least temporarily, shifted up a gear after a lacklustre 2019. The housing market has seemingly been boosted from increased optimism and reduced uncertainties following December’s general election
  • We currently expect house prices to rise 3% during 2020
  • Housing market activity, and possibly to a lesser extent prices, could be given a modest lift if the government introduces specific measures aimed at boosting the sector in the budget on 11 March. Furthermore, mortgage interest rates are at historically low levels with a very real possibility that the Bank of England could cut interest rates. Additionally, a relative shortage of properties for sale is likely to continue to provide some support to prices
  • While the fundamentals for consumers should still be pretty decent in 2020, we suspect that earnings growth will be below the peak levels seen around mid-2019 and employment growth will be slower overall. Consequently, the upside for house prices in 2020 is likely to be limited.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The Bank of England reported that mortgage approvals for house purchases rose markedly to 70.888 in January, taking them to the highest level since February 2016. This was up from 67,930 in December, 65,954 in November and a seven-month low of 65,285 in October.

“The data very much fuels the view that the housing market is currently benefiting markedly from increased confidence and reduced uncertainties following December's general election. In contrast, housing market activity had been particularly sluggish in the latter months of 2019, falling to a seven-month low in October indicating that activity was being pressurised by heightened uncertainties over the domestic political situation and Brexit.

“Survey evidence suggests that the housing market is currently benefiting from reduced uncertainties following December’s decisive general election. In particular, the influential RICS January survey signalled “a continued improvement in market activity over the month, with indicators on demand, sales and fresh listings all moving further into positive territory.” The survey showed the buyer enquiries balance rose to +23 in January after jumping to +19 in December from -5 in November, with interest up across the “vast majority” of regions. Additionally, the agreed sales balance improved to +21 in February from +9 in December and -6 in November, which were the first positive reading since May.”

Outlook for House Prices

“A stream of recent data and surveys suggest that the housing market has shifted up a gear after a lacklustre 2019, with particular softness around the third quarter.

“Certainly, there is compelling evidence that the housing market has got benefited from increased optimism and reduced uncertainties following December’s decisive general election as well as greater near-term clarity on Brexit with the UK having left the EU on 31 January with a deal.

“We had been expecting the housing market to continue to benefit in the near term from reduced uncertainties, but it is possible that concerns and uncertainties over the coronavirus outbreak could have an impact.

“We currently expect house prices to rise 3% over 2020.

“Housing market activity, and possibly to a lesser extent prices, could be given a modest lift if the government introduces specific measures aimed at boosting the sector in the budget on 11 March. 

“Furthermore, mortgage interest rates are at historically low levels. Indeed, there is a very real possibility that the Bank of England could cut interest rates over the coming months.

“A relative shortage of houses on the market will also likely offer some support to prices, although more houses have recently been coming up for sale. The latest RICS survey showed new instructions to sell rose for a second month running in January and at a sharply increased rate. However, the RICS noted that “this improvement in the volume of listings coming onto the sales market follows a protracted period of falling supply, meaning average stock levels on estate agents books remain very low when placed in a historical context (at 43 properties).”

“Meanwhile, even if ultimately successful, the government’s recent, and ongoing, initiatives to boost house building will take time to have a significant effect. Therefore they are unlikely to markedly influence house prices in the near-term at least.

“While a positive for the housing market is that consumers’ purchasing power has picked up appreciably since mid-2018 and employment has reached record highs, latest developments for consumers have been less favourable. Specifically, having improved from 0.1% in the three months to June 2018 to 2.0% in the three months to July 2019, real earnings growth eased back to 1.4% in the three months to December. We suspect earnings growth is likely to stabilise at or just below recent lower levels.”

 

Consumer credit growth stable in January after picking up in December from November’s lowest level since June 2014

  • The Bank of England reported that year-on-year unsecured consumer credit growth was stable at 6.1% in January after picking up to this level in December from 5.9% in November, which had been the weakest growth rate since June 2014.
  • Net unsecured consumer credit edged back to £1.230 billion in January after rising to £1.337 billion in December from just £663 million in November, which had been a six-year low.
  • Recent marginally stronger consumer credit growth could be a sign that consumers are gradually becoming more willing to borrow and spend. Confidence has increased since December’s general election, and there was a pick-up in retail sales in January.  
  • A key factor for growth prospects will be whether this improvement in consumer confidence will continue and will it translate into greater willingness to spend on a sustained basis?

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The Bank of England reported that annual growth in unsecured consumer credit was stable in January after picking up modestly in December from November’s lowest level since June 2014.

“Specifically, annual unsecured consumer credit growth remained at 6.1% in January after rising to this level in December from 5.9% in November. Annual unsecured consumer credit growth had previously trended down to the November 2019 low from a peak of 10.9% in November 2016. The overall slowdown in consumer credit growth has clearly been significantly affected by markedly weaker private car sales as this has reduced demand for car finance.

“Net unsecured consumer credit edged back to £1.230 billion in January after rising to £1.337 billion in December from just £663 million in November, which had been a six-year low. It was down from the January 2019 level of £1.335 million.

“Net credit card borrowing amounted to £238 million in January, which was down from a 10-month high of £439 million in December

“Stable unsecured consumer credit growth in January came amid some evidence of improved consumer activity. Retail sales volumes rose 0.9% month-on-month in January. However, private new car sales fell 13.9%.

Some signs that consumers have become more prepared to spend but remains to be seen if it is sustained

“Consumer confidence has clearly picked up since December’s general election; this is evident in a number of surveys. GfK reported consumer confidence rose to a 17-month high in February from November's equal lowest level for 2019 (and since mid-2013). Additionally, the February IHS Markit’s household finance index showed consumers were the most upbeat about their finances since the survey began 11 years ago.

“A key factor for growth prospects will be whether this improvement in confidence continues and will it translate into greater willingness to spend on a sustained basis?

“The fundamentals for consumers are likely to be reasonable over the coming months with employment high and real earnings growth at a reasonable level. Indeed, employment rose 180,000 in the three months to January to be at a record high of 32.934 million while real earnings growth was a respectable 1.4%

“Nevertheless, earnings growth has moderated since mid-2019 and we suspect that employment growth will likely be lower overall in 2020 than in 2019.

“The latest data shows average annual earnings growth moderated to 2.9% in the three months to December (compared to an 11-year high of 3.9% in the three months to July 2019) with regular earnings growth at 3.2% and we suspect it is likely to stabilize around 3.2%. Despite consumer price inflation dipping to a 37-month low of 1.3% in December, ONS data indicated that real earnings growth moderated to 1.4% in the three months to December after rising to 2.0% in the three-months to June 2019 from just 0.1% in the three months to June 2018. The recent moderation in regular earnings growth has been less pronounced; it was 1.8% in the three months to December compared to a peak of 2.0% in the three months to June.

“Disappointing news for consumer purchasing power saw consumer price inflation spike to a six-month high of 1.8% in January from a 37-month low of 1.3% in December, but it still looks likely to trend back down to around 1.3% by mid-2020 and we expect it to average a modest 1.5% over 2020.

“Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April. The budget could also well contain other supportive measures, including raising the threshold for paying national insurance.

“There are other factors which may limit the consumer spending. In particular, with the savings ratio relatively low, many consumers may be keen to avoid running down their savings.

“Additionally, lenders have become more careful about advancing unsecured credit. Indeed, the latest Bank of England credit condition survey indicated that lenders reduced the amount of unsecured credit available to consumers in the fourth quarter of 2019 for a 12th successive quarter. It was expected to decline modestly further in the first quarter of 2020. Furthermore, lenders were reported to have further tightened their lending standards for granting unsecured consumer loan applications in the fourth quarter of 2019. This was a 13th successive quarter of tightening standards. A further significant tightening of lending standards was anticipated over the first quarter of 2020.”