Fall in mortgage approvals hints at house price drops to come

Higher interest rates and the fall in take-home pay are driving a decline in new mortgages, with the number approved falling below pre-pandemic levels last month.

The number of mortgages approved for house purchases fell at the end of last year to the lowest level since the financial crisis, outside of the pandemic, in early signs of a slowdown in the housing market that is expected to reduce prices.

Mortgage approvals were down 23 per cent month-on-month to 35,600 in December — the fourth consecutive monthly drop — statistics published by the Bank of England show. The figure is lower than economists had predicted and falls far short of the average of 66,500 approvals a month averaged between 2015 and 2019. The number of approvals was last this low in May 2020, during the first coronavirus lockdown, and before that in January 2009 at the height of the financial crisis.

The decline indicates a slowing of the housing market after a year of back-to-back interest rate rises, which have pushed up the cost of taking out a mortgage.

The trend is set to continue, with house prices expected to fall back to 2021 levels following the boom years of the pandemic. Economists surveyed by The Times at the turn of the year predicted that house prices would fall by more than 4 per cent in 2023, with many warning of a double-digit decline. The Oxford Economics consultancy expects prices to fall by 12 per cent this year after growing by around a fifth since early 2020.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a consultancy, said: “House purchase mortgage approvals continued to fall sharply in December, despite more lenders returning to the market after they ran scared in the immediate aftermath of [September’s] mini-budget. The -39 level of the new buyer enquiries balance of the RICS Residential Market Survey suggests that demand will remain very weak over the coming months.”

The 32 basis point rise to 3.67 per cent in the effective interest rate, which is the cost of borrowing after compounded interest is taken into account over time, on newly-drawn mortgages looks “surprisingly modest” he said, adding: “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. We expect the effective interest rate on new mortgages to soar in January, three months on from the peak in quoted rates.”

The data released by the central bank also covered borrowing and credit figures, which showed that households were cautious about credit and mostly did not draw on savings to spend at the end of last year.

“Net consumer borrowing was £500 million in December, partly reflecting rising living expenses due to inflation,” Benjamin Trevis, economist at the Centre for Economics and Business Research, said. “However, net borrowing was much weaker than the previous six-month average of £1.2 billion, likely due to higher interest rates making products more expensive and promoting saving.”

Inflation is thought to have peaked at 11.1 per cent in October before falling back to its current 10.5 per cent. However, it remains close to a 40-year high at more than five times the Bank of England’s 2 per cent target.

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Fall in mortgage approvals hints at house price drops to come