- Although housing market activity in June was stronger than the previous month, this is likely to represent temporary respite before the impact of higher mortgage rates feeds through. The EY ITEM Club expects a lengthy period where housing market activity remains subdued.
- Reinforcing the adverse effect on the economy from a weak housing market was evidence that households have returned to savings mode, with cash deposited in bank accounts seeing a net rise in June. But consumers' appetite for unsecured debt did pick up, offering a sign that dissaving is providing some, if modest, support to spending.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “June saw many lenders push up mortgage rates following an abrupt market reaction to last month's upside inflation and wage surprises. However, housing market activity picked up, though the scale of the gain was modest. Mortgage approvals in June rose to 54,662 from 51,143 in May. This was the highest since last October, but still down almost 15% year-on-year.
“Meanwhile, net mortgage lending of £0.1bn was an increase on -£0.1bn the previous month. But the marginal rise represented a lagged reaction to the modest revival in approvals over the spring and was still very low by past standards. And given June's still-modest level of approvals, net mortgage advances are likely to remain low over the next few months.
“The EY ITEM Club thinks housing market activity will remain subdued in the second half of this year. Although mortgage rates have edged down a little from their recent highs, as markets repriced following lower-than-expected inflation in the latest data, the cost of home loans remains well above where it was just a few months ago. And with the Bank of England likely to raise Bank Rate again later this week, the extent to which mortgage rates fall back will likely be limited.
“Weakness in housing market activity and the subsequent consequences for household wealth won't help the consumer sector. Nor will evidence that consumers returned to savings mode in June. An additional £3.4bn was deposited in bank accounts, more than cancelling out May's net withdrawal of £3.1bn. On the other hand, net unsecured lending of £1.7bn in June was the highest since April 2018. But high inflation will have flattered that number, suggesting that dissaving will offer only modest support to consumer spending.”