UK mortgage lending set to fall in October – EY ITEM Club comments

• Net mortgage lending and mortgage approvals were strong in August, but the recent increase in market interest rates is reversing this, and mortgage costs are rising alongside a reduction in the availability of home loans. 

• Meanwhile, net lending for consumer credit is down month on month, and evidence suggests households’ ability to save currently is also falling. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “August saw net mortgage lending of £6.1bn and mortgage approvals of 74,300. This was significantly up on July's £5.1bn and 66,800 respectively but the increases look like anomalies in a month that typically has low levels of activity. The rise in mortgage rates since the recent Mini-Budget, and the withdrawal of many mortgage products, prompted by volatility in the gilt market, point to a significant slowdown in transactions and lending with a probable fall in property prices ahead. 

“While current market expectations for Bank Rate to reach close to 6% next year look too high, the Bank of England intervention to lower gilt rates is expected to prompt lenders to bring back some products. However, a looser fiscal policy and averting the inflationary risks of further sterling weakness means the Monetary Policy Committee is likely to raise interest rates in its next few meetings, which will add have further adverse consequences for the housing market.   

“Meanwhile, data on household lending and deposits offer mixed messages on whether consumers are responding to financial strains by borrowing more and saving less. Net unsecured lending stood at £1.1bn, down from £1.5bn the previous month. This is a little above the pre-pandemic average of £1bn in the 12 months to February 2020. However, on the savings side, households added an extra £3.2bn to bank deposits in August, below the £3.9bn of the previous month. 

“The national accounts for Q2 2022 showed another reduction in the household saving ratio, suggesting that ‘dissaving’ is offering some support to consumer spending in the face of high inflation and falling real incomes. But given the uncertain economic environment and recent volatility in financial markets, it wouldn't be a surprise if consumers begin to take a more cautious approach with their finances.”