The combination of falling gross unsecured lending, higher debt repayments, and a large rise in deposits is consistent with households’ low confidence. The potential for mortgagors to save more in anticipation of a significant rise in their debt servicing costs could reinforce these trends, and the short-term outlook for consumer spending is weak.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Mortgage activity fell significantly in September after a surprise increase in activity in August. Approvals for home purchase were 66,789 in September, down from 74,422 in August and a little below the average of the year-to-date. Net lending held steady at £6.1bn in September.
“The rise in swap rates following the mini-Budget caused a sizeable increase in quoted interest rates for fixed rate mortgages, meaning that house prices looked heavily overvalued based on mortgage affordability. Swap rates have since fallen back, with mortgage rates set to follow. However, interest rates are likely to remain well above the levels seen in the first half of this year, and house prices will continue to look stretched. This is likely to cause new buyer demand to fall in the short-term. While the high share of fixed-rate mortgage deals will slow the pace at which borrowers have to face higher debt servicing costs – and so limit the extent of ‘forced’ sales – a correction in house prices still remains likely.
“Net unsecured lending fell back to just £0.7bn in September, down from £1.2bn in October and a nine-month low. This was due to both another rise in the already-high level of repayments and a fall in gross lending. At the same time, the monthly increase in household deposits of £8.1bn was at a 15-month high.
“The monthly data can be volatile and prone to revision. However, this combination is indicative of a household sector that is low on confidence and either unable, or unwilling, to borrow more and save less to try to push back against the squeeze on real incomes. The EY ITEM Club thinks that with many mortgagors facing significant increases in their debt servicing costs in the next couple of years, they could begin to save more to try to absorb the higher payments.”