Mortgage growth set to reach decade low as high rates drive down demand
UK mortgage growth is set to reach a ten-year low in 2023 and 2024, according to the latest forecast from the EY Item Club, as high interest rates and subdued economic growth drive down demand among homebuyers.
The economic forecasting group predicted that net mortgage loans would rise 1.5 per cent in 2023 and two per cent in 2024, representing the lowest two-year growth in a decade.
The rising cost of borrowing is weighing heavily on lenders as the UK economy teeters on the edge of a recession due to the Bank of England’s high interest rates.
Data from the central bank last week showed that both mortgage and consumer lending dropped in September as the interest rates on bank loans continued rising.
Net mortgage lending averaged £0.3bn per month from January to September 2023, down from £5.7bn over same period last year when mortgage approvals were around 40 per cent higher.
EY expected that mortgage lending would pick up in 2024 and 2025 if inflation continued to fall, the central bank cut interest rates and housing became more affordable.
However, the 2.8 per cent growth forecast for 2025 is still below the three per cent pre-pandemic average between 2015 and 2019.
Economists expect high interest rates, inflation and a weak labour market to weigh on the UK’s GDP growth into next year.
“The ‘higher for longer’ borrowing rates and ongoing cost of living pressures are continuing to have a very real impact on customers, and at the same time, banks are tightening their lending criteria,” said Dan Cooper, UK head of banking and capital markets at EY.
“Banks are actively working to retain a strong capital position and support their customers in this challenging market. With interest rates now expected to peak at a lower level than previously predicted, we should see a gradual improvement in consumer and business confidence over the next two years, leading to greater appetite to borrow.”
EY also flagged the downside risk from international conflicts in the Middle East and Ukraine, which may hamper borrowing appetite in the near term.