Press release

29 Mar 2023 London, GB

Weak mortgage demand, but the lowest point may have been passed – EY ITEM Club comments

Should global financial volatility result in a tightening in banks' lending standards, it could mean the outlook for household lending – and consequently the real economy – becomes more uncertain.

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James White

Senior Executive, Media Relations, Ernst & Young LLP

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Related topics Growth
  • Mortgage approvals and lending remained weak in February, although the former is picking up

  • On consumer credit, there were mixed signs with spending supported by higher borrowing and lower saving rates

  • Should global financial volatility result in a tightening in banks' lending standards, it could mean the outlook for household lending – and consequently the real economy – becomes more uncertain. If banks tighten criteria, the housing market could weaken more than expected and consumers would have less scope to use debt to support spending.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The latest household lending data indicated continued weakness in housing market activity, albeit with signs that the worst may be in the past. Mortgage approvals rose to 43,536 in February from 39,647 the previous month, the first increase since last August. But this was still well below the 62,677 per month averaged during 2022. Reflecting the lagged impact of the fall in approvals at the turn of 2022 and 2023, net mortgage lending also fell to £0.7bn, the lowest since April 2016, excluding the pandemic period.

“A recovery in approvals won't have been helped by the cost of home loans rising further. The average interest rate on a new mortgage was 4.24% in February, up from 3.88% in January, and only 1.60% in February 2022.

“Meanwhile, net consumer credit stood at £1.4bn in February. This was down from January's £1.7bn, but a little above the 2022 average of £1.2bn. Granted, high inflation means the real terms picture is less solid. However, with households adding the smallest amount to their bank deposits in almost five years in February, changes in credit and savings behaviour may be offering some support to consumption against a backdrop of falling real wages. 

“The latest lending numbers relate to a period before the recent global financial volatility. The unknown is the extent to which banks respond to that volatility by tightening lending standards. The optimistic view is that the capital and liquidity strength of UK banks mean there's little effect, and lending to households can carry on as before. But in the pessimistic case, should lending standards tighten, it could mean further weakness in the housing market and a reduction in consumers' ability to use debt to compensate for falling real incomes.”