The UK’s housing market is showing growing signs of stress, with mortgage lending collapsing to the lowest monthly level on record, and property valuations falling at the fastest annual rate in almost 14 years.
Figures from the Bank of England show borrowing of mortgage debt fell sharply in April, with consumers repaying £1.4bn more than was taken out in new lending on the month. The Bank said April’s figure, continuing a decline from net zero borrowing in March, was the lowest since records began in 1993, excluding the Covid pandemic.
Separate figures from the Nationwide building society showed that house prices fell in May at an annual rate of 3.4%, representing the sharpest fall since July 2009, when the British economy was grappling with the fallout from the 2008 financial crisis.
The figures reflect the central bank’s most aggressive round of interest rate increases in decades feeding through to the property market, as Threadneedle Street ramps up borrowing costs in response to stubbornly high inflation.
Martin Beck, chief economic adviser to the EY Item Club, said: “The numbers point to a housing market struggling in the face of pressure on household finances and higher mortgage rates. And rates could head up further, putting more pressure on housing market activity.”
The Bank said net mortgage approvals for house purchases fell from 51,500 in March to 48,700 in April, while remortgaging approvals increased slightly from 32,200 to 32,500. It said the effective interest rate – the rate paid by consumers – on newly drawn mortgages rose by 5 basis points to 4.46%.
Borrowing costs have risen dramatically in recent months after 12 straight interest rate increases from the central bank, taking its key base rate from 0.1% in December 2021 to the current level of 4.5%. With Britain suffering the stickiest rates of inflation in the G7 group of advanced economies, financial markets expect that the central bank could drive interest rates above 5.5% before the end of the year.
Against a backdrop of rising interest rates, banks and building societies have pulled almost 800 residential and buy-to-let mortgage deals in the past few days and warned homeowners looking for new mortgage deals to be prepared for fixed rates above 5%.
The financial data provider Moneyfacts said the average rate on a new two-year fixed mortgage had crept up this week, from 5.38% on Tuesday to 5.49% on Thursday. At the start of May the average was 5.26%. The average five-year fixed rate was 5.05% on Tuesday, and is now 5.17%.
Highlighting the impact on the property market, the latest figures from Nationwide showed that house prices dipped by 0.1% in May from the level a month earlier. Although this was a more positive showing than in April, when prices rose for the first time in seven months, the building society warned that the housing market was facing “headwinds” that would increase in the coming months.
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Nationwide said house prices had largely remained flat over the past month after seasonal effects had been taken into account, taking the average price of a home in the UK to £260,736.
That remains 4% below the peak seen in August 2022, before former prime minister Liz Truss’s disastrous autumn mini-budget resulted in borrowing rates shooting up for prospective buyers and those remortgaging their homes.
Robert Gardner, the Nationwide chief economist, warned that interest rates would remain high for longer than previously expected.
“If maintained, this is likely to exert renewed upward pressure on mortgage rates, which had been trending down after spiking in the wake of the mini-budget in September last year,” he said.
The cost of remortgaging has risen by 38% since the end of 2019, according to House of Commons library research commissioned by the Liberal Democrats. Sarah Olney, the party’s Treasury spokesperson, said: “Families are seeing their mortgage bills skyrocket as a result of the Conservative party’s mismanagement of the economy.
“The hard-working middle are already facing the highest tax burden in 70 years; now they are facing yet another mortgage hammer blow.”