Press release

29 Jul 2020 London, GB

Mortgage approvals up in June from May’s record lows – EY ITEM Club comments

The Bank of England reported that mortgage approvals for house purchases rose to 40,010 in June from May’s record low of just 9,273. This followed the easing of restrictions on housing market activity in England from mid-May. Restrictions for the Welsh, Northern Irish and Scottish (at end of month) housing markets eased during June.

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Related topics Growth COVID-19
  • While an improvement on May, June’s approvals were still down 39.4% year-on-year and the third lowest level of mortgage approvals for house purchases since January 2009
  • Housing market activity may well see a pick-up in the near term providing some support to prices, as a result of the raising of the Stamp Duty threshold, along with the release of some pent-up activity following the easing of lockdown restrictions
  • Nevertheless, the EY ITEM Club suspects the upside for the housing market will be limited due to challenging fundamentals for consumers
  • The EY ITEM Club suspects that the housing market is likely to come under pressure over the final months of 2020 when there is likely to be a rise in unemployment. House prices could be around 3% lower than now by the end of the year
  • The EY ITEM Club expects housing market activity to gradually improve in 2021 as the UK’s economic recovery gains traction, the labour market starts to recover and consumer confidence improves. Very low borrowing costs should also help with the Bank of England unlikely to lift interest rates from 0.10% for some time
  • Even so, the EY ITEM Club expects house price gains to be no more than 2-3% in 2021

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

“The Bank of England reported that mortgage approvals for house purchases rose to 40,010 in June after falling to a record low of just 9,273 in May from 15,856 in April, 56,340 in March and a more than six-year high of 73,661 in February.

“While an improvement on May, June’s level was still down 39.4% year-on-year and the third lowest level of mortgage approvals for house purchases since January 2009.

“June’s rise in mortgage approvals occurred following the easing of housing market restrictions in England on 13 May. The easing of restrictions for the Welsh, Northern Irish and Scottish (at end of month) housing markets occurred during June.

“There does appear to have been an immediate pick-up in housing market activity following the easing of restrictions. For example, the monthly RICS residential survey for June observed that its results pointed to “a recovery emerging across the market, with indicators on buyer demand, sales and fresh listings all rallying noticeably following the lockdown related falls beforehand. That said, respondents still appear relatively cautious on the prospect of this improvement being sustained over the longer term, as twelve-month sales expectations are now marginally negative.””

Stamp duty threshold increase likely to offer near-term support but this will be limited

Howard Archer continues: “The raising of the Stamp Duty threshold to £500,000 from mid-July until 31 March 2021 should provide some near-term support to housing market activity.

“Early survey evidence from Rightmove suggests that there has been an initial beneficial impact from the Stamp Duty move on housing market activity. Rightmove reported that the number of sales agreed in England increased by an annual 35% in the five days after the Chancellor’s announcement on July 8.”

Outlook for the UK housing market

Howard Archer comments: “Housing market activity may well see a pick-up in the near term providing some support to prices, as a result of the raising of the Stamp Duty threshold, along with the release of some pent-up activity following the easing of lockdown restrictions. The easing of lockdown restrictions affecting the housing market has occurred later in Wales, Scotland and Northern Ireland than in England, so there may be some catching up there. This could result in house prices firming modestly over the next few months after falling back in recent months.

“Nevertheless, the EY ITEM Club suspects the upside for the housing market will be limited due to challenging fundamentals for consumers. Many people have already lost their jobs, despite the supportive Government measures, while others will be concerned that they may very well still end up losing their job once the furlough scheme ends. Additionally, many incomes have been affected. Consumer confidence is currently still low compared to long-term norms and many people are likely to remain cautious for some time to come when making major spending decisions such as buying or moving house.

“The EY ITEM Club suspects that the housing market is likely to come under pressure over the final months of 2020 when there is likely to be a rise in unemployment, which will not only adversely affect the fundamentals for house buyers but also likely heighten consumer insecurities and fuel caution on committing to buying a house. Consequently, the EY ITEM Club predicts that the housing market could struggle late on in 2020 with house prices coming under downward pressure.

“The EY ITEM Club suspects that house prices could well be around 3% lower than now by the end of the year.

“The EY ITEM Club expects the housing market to remain under pressure over the early months of 2021, although some temporary support in the first quarter will likely come from buyers looking to take advantage of the Stamp Duty threshold increase before it ends on 31 March – although there is always the possibility that the Chancellor could extend it in the Autumn budget.

“The EY ITEM Club does expect housing market activity to gradually improve as 2021 progresses and the UK’s economic recovery gains traction, the labour market starts to recover and consumer confidence improves. Very low borrowing costs should also help with the Bank of England unlikely to lift interest rates from 0.10% for some time. Even so, expect house price gains to be no more than 2-3% in 2021.”

Consumers repaid credit for a fourth successive month in June, but only marginally

  • The Bank of England reported there was a marginal repayment of £86 million of unsecured consumer credit in June; this was a fourth successive repayment, the first time this had happened since the second half of 2010. June’s repayment was down from £4.5 billion in May and a record repayment of £7.4 billion in April
  • The year-on-year growth rate in unsecured consumer credit became increasingly negative in June, standing at a record -3.6%
  • The recent net repayment of unsecured credit has tied in with weakened consumer activity, which has reflected not only heightened consumer caution amid COVID-19’s impact on the economy, but also a lack of opportunity to spend due to the restrictions on activity
  • June’s marginal net repayment of credit reflected a pick-up in consumer activity as restrictions were eased with both retail sales and private car sales rising over the month. However, spending on consumer services would have remained weak over the month with much of the sector still shut, notably the hospitality sector
  • On the positive side, four months of net repayment of unsecured consumer credit totalling £15.7 billion over March-June has improved many households’ balance sheets, which will improve some consumers’ purchasing ability

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

“The Bank of England reported that there was a marginal net repayment of £86 million of unsecured consumer credit in June.

“However, this was down significantly from net repayments of £4.5 billion in May and a record £7.4 billion in April. There had also been another net repayment of £3.7 billion in March.

“The Bank of England also reported that the year-on-year growth rate in unsecured consumer credit became increasingly negative in June, standing at -3.6%. This was the deepest negative rate since the series started in 1994 and followed readings of -3.0% in May and -0.4% in April (the first negative reading since August 2012).

“Unsecured consumer credit growth has trended down from a peak of 10.9% in November 2016. The overall slowdown in consumer credit growth has been significantly affected by weaker private car sales as this has reduced demand for car finance.

“The recent net repayment of unsecured credit has tied in with weakened consumer activity, which has reflected not only heightened consumer caution amid COVID-19’s impact on the economy but also a lack of opportunity to spend due to the restrictions on activity.

“However, there was a clear pick-up in consumer activity in June as restrictions were eased. Car showrooms were allowed to open at the start of June, while non-essential retailers were allowed to open from mid-month. Consequently, retail sales volumes rose 13.9% month-on-month in June reducing the year-on-year decline to 1.6%, while the year-on-year drop in private new car sales moderated to 19.2% in June from 83.8% in May and 98.7% in April. However, spending on consumer services would have remained weak over the month with much of the sector still shut, notably the hospitality sector.

“Meanwhile, GfK reported that consumer confidence improved modestly over June, although it remained well below the levels seen in February.

“On the positive side, four months of net repayment of unsecured consumer totalling £15.7 billion over March-June has improved many households’ balance sheets which will improve some consumers’ purchasing ability.”