Press release

1 Sep 2020 London, GB

July mortgage approvals up to five-month high after May’s record lows – EY ITEM Club comments

July’s rise in mortgage approvals provides evidence of the marked pick-up in housing market activity that has occurred since the easing of restrictions.

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Related topics Growth COVID-19
  • The Bank of England reported that mortgage approvals for house purchases rose to a five-month high of 66,281 in July, from 39,902 in June and a record low of 9,285 in May
  • July’s rise in mortgage approvals provides evidence of the marked pick-up in housing market activity that has occurred since the easing of restrictions. This trend has been reinforced by the Chancellor raising the Stamp Duty threshold to £500,000 from mid-July through to 31 March 2021
  • In the immediate future, further pick-up in housing market activity and house prices is likely, especially given the largely positive survey evidence for August
  • However, 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 and start of 2021 due to a likely rise in unemployment
  • Some temporary support in Q1 is likely to come from buyers looking to take advantage of the Stamp Duty threshold increase before it ends. Although, there is a possibility that the Chancellor could extend it in the Autumn Budget
  • The EY ITEM Club suspects that house prices could be around 3% lower than now at the end of the year
  • The EY ITEM Club expects housing market activity to gradually improve as 2021 progresses, while 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% during 2021. 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 picked up for a second month running in July to be at a five-month high of 66,281. This was up from 39,902 in June and a record low of 9,285 in May. Mortgage approvals for house purchases had previously fallen to May’s record low from 15,867 in April, 56,289 in March and a more than six-year high of 73,681 in February.

“July’s rise in mortgage approvals provides hard evidence of the significant pick-up in housing market activity that has occurred since the easing of restrictions that started in England on 13 May. The easing of restrictions for the Welsh, Northern Irish and Scottish housing markets occurred during June.

Outlook for the UK housing market

Howard Archer continues: “Housing market activity may see a further 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.

“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 still end up losing their job once the furlough scheme ends. Additionally, many incomes have been affected. Consumer confidence is 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 as the furlough scheme draws to a close in October. This will not only adversely affect the fundamentals for house buyers, but also likely fuel caution on committing to buying a house. Consequently, the EY ITEM Club predicts that house prices will come under downward pressure late on in 2020.

“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.

“Consequently, the EY ITEM Club suspects that house prices could be around 3% lower than now at the end of the year.

“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% during 2021. Even so, the EY ITEM Club expects house price gains to be no more than 2-3% in 2021.”

 

July saw first rise in unsecured consumer credit since February

  • The Bank of England reported there was an increase of £1.2 billion in net unsecured consumer credit in July; this followed four successive months of net repayments, which had been the first time that this had happened since the second half of 2010
  • The year-on-year decline in unsecured consumer credit became marginally less negative in July, standing at -3.6% compared to a record -3.7% in June
  • The return to net unsecured borrowing by consumers in July ties in with a recent pick-up in consumer activity as lockdown restrictions have been progressively eased with the opening up of the retail, car showroom and consumer services sectors. It reinforces the EY ITEM Club’s expectation that the economy is on course for a strong bounce-back in Q3, with consumer spending leading the way
  • The four months of net repayments of unsecured consumer credit through to June had been the consequence of a lack of opportunity to spend due to the restrictions on activity, as well as heightened consumer caution amid COVID-19’s impact on the economy
  • On the positive side, the four months of net repayment of unsecured consumer credit, totalling £15.9 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 an increase of £1.22 billion in unsecured consumer credit in July. This was the first increase since February. It was also up slightly on the £1.11 billion increase in unsecured consumer credit that occurred in July 2019.

“There had previously been four months of net repayments in unsecured consumer credit, although this had slowed to £382 million in June from £4.4 billion in May and a record £7.4 billion in April. There had also been another net repayment of £3.7 billion in March. March-June had marked the first time that there had been four successive months of net repayments of unsecured consumer credit since the second half of 2010.

“The Bank of England also reported that the year-on-year decline in unsecured consumer credit edged back to -3.6% in July from a record -3.7% in June (the series started in 1994). The year-on-year change in unsecured consumer credit had turned negative in April for the first time since August 2012, having trended down from a peak growth rate of 10.9% in November 2016.

“The four months of net repayments of unsecured consumer credit through to June had been the consequence of a lack of opportunity to spend due to the restrictions on activity as well as heightened consumer caution amid COVID-19’s impact on the economy. The overall slowdown in consumer credit growth had originally been affected by weaker private car sales as this reduced demand for car finance.

“However, there was a clear pick-up in consumer activity in July and 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. Additionally, hospitality and consumer services sectors were allowed to increasingly open from early-July, including restaurants and pubs.

“Consequently, retail sales volumes rose 3.6% month-on-month in July after a strong gain in June, resulting in a year-on-year increase of 1.4% which was the first annual gain since January. Furthermore, retail sales volumes in July were 3.0% above their February level - before the sector was affected in March by the pandemic and, especially in April by the lockdown. Additionally, private new car sales rose 20.4% year-on-year in July. There will also likely have been a significant pick-up in consumer spending on services.

“Meanwhile, consumer confidence has come off its May lows, although it remained well below the levels seen in February.

“On the positive side, the four months of net repayment of unsecured consumer totalling £15.9 billion over March-June has improved many households’ balance sheets which will improve some consumers’ purchasing ability.”