Housing activity remains weak, with little improvement in sight – EY ITEM Club comments

• Housing market activity remained very subdued in May, with mortgage approvals down nearly 25% year-on-year and net lending negative. June's rise in mortgage rates will further weigh on demand, so May could represent the high point for mortgage activity for the immediate future.
• Consumers have shed some of the caution that restrained spending in 2022, with a sizeable net withdrawal of deposits in May. However, evidence of dissaving is far from conclusive – growth in gross lending remains well below inflation and debt repayments are high. So how much support activity will get from an increasing appetite for credit and the running down of pandemic savings remains inconclusive.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “May's Bank of England data on household lending and deposits reported a modest recovery in mortgage approvals to 50,524 from 49,020 in April. But this was still down 24% on a year earlier, and May's reading may prove the high point for the immediate future. 

“Mortgage interest rates have risen significantly during June, driven upwards by the increase in swap rates. This has caused a significant deterioration in mortgage affordability and is likely to keep housing activity at very low levels. Net mortgage lending remained in negative territory in May, reflecting past weakness in approvals. Given the poor outlook for approvals, very low, or even negative net lending is likely to be the norm for the summer.  

“Data on unsecured lending and household deposits was mixed. Net unsecured lending fell back to £1.1bn in May, a five-month low. Growth in gross lending remained well below inflation, while repayments increased from already-high levels. On the flip side, households withdrew a net £4.6bn from banks and building societies in May, the highest figure on record. But it should be noted that the Bank of England reported a similarly large net withdrawal in March, only to subsequently revise it to a much smaller figure. 

“On balance, households appear to have shed some of the caution that restrained spending during 2022. But it’s still unclear whether they're in the mood to offset the myriad of headwinds on their spending power by taking on more credit or spending much of their excess savings. With the impact of higher debt servicing costs set to steadily emerge in the second half of 2023 and in 2024, the consumer recovery is likely to remain in a low gear.”