A tumble in mortgage approvals could be followed by a fall in house prices, analysts believe
Mortgage approvals have plummeted to their lowest since the credit crunch after the global financial crisis in 2008, excluding the pandemic when the housing market was shut down, in a sign house prices could fall sharply soon, according to official data.
The number of loans to Brits to fund a home purchase dropped more than fifth over the last month to 35,612, down from 46,186 in November, Bank of England numbers show.
It is the lowest monthly figure since January 2009 – when stripping out Covid-19 distortions – a time when Britain’s biggest high street lenders retreated from lending people money for fear they would be unable to repay their debts after they were scorned by the near collapse of global banking system during the financial crisis.
Mortgage approvals caving signal UK house prices could be on a downward trend in the first half of this year due to Brits shunning taking on debt with substantially higher interest rates.
Figures from Nationwide, Halifax and Zoopla have all shown UK house prices falling over the last month.
“The extremely high cost of mortgage borrowing has caused more buyers to withdraw from the market,” Andrew Wishart, senior property economist at Capital Economics, said.
Lenders jacked up their mortgage rates in the aftermath of Liz Truss’s ill-fated mini budget, in which she launched £45bn of unfunded tax cuts despite inflation running at multi-decade highs.
Her and former chancellor Kwasi Kwarteng’s deluge of fiscal loosening spooked financial markets, sparking a near-fire sale in a small section of Britain’s pension market.
As a result, rates on UK gilts – which are used to price mortgage rates – rose to a more than two decade high in a matter of weeks.
Those higher rates in financial markets were passed on by lenders, prompting potential homeowners to ditch purchases.
According to data provider Moneyfacts, the rate on the average 2-year and 5-year mortgage has doubled over the last year and is still more than five per cent despite UK gilt yields now trading around 3.5 per cent.
Experts warned last month’s sharp drop in mortgage approvals could be the tip of the iceberg.
“Mortgage applications can take many months to go through, and the lending in December will have been based on mortgage offers three months ago, largely before the mini-budget” Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said.
This means the huge rate increase after Truss’s mini-budget has yet to fully spread to consumers.
The Bank of England has also raised interest rates nine times in a row to 3.5 per cent their highest level since 2009, forcing mortgage costs higher. It is expected to nudge them 50 basis points higher again on Thursday.
In December, “effective interest rates on new mortgages saw their largest rise since December 2021, when the BoE started to raise interest rates, up 32 [basis points] to 3.67 per cent,” Wishart added.
“As it typically takes 2-6 weeks for a mortgage application to be approved, this rate is expected to continue to rise as average quoted rates for November remained at their peak of around five per cent,” he added.