UK Finance reports mortgage approvals picked up to 5-month high in July from 9-month low in June. The housing market remains under pressure from an increased squeeze on consumers and heightened caution over engaging in major transactions. House prices look unlikely to rise by more than 2% over 2017, and could be essentially flat over 2018. UK Finance also reported stable consumer credit growth in July, below recent peak levels. Evidence that consumer credit growth may well have peaked eases pressure for any near-term interest rate hike by the Bank of England.

By Howard Archer, Chief Economic Advisor to the EY ITEM Club:

UK Finance reported that mortgage approvals for house purchases rebounded to a five-month high of 41,587 in July, having slowed over the previous five months to be at a nine-month low of 40,385 in June.

Even so, at 41,587 in July, mortgage approvals were still 6.5% below January’s peak level of 44,295. They are also well below the average monthly level of 52,261 seen during 1997-2017

Lacklustre housing market activity has been weighing down on house prices. July data from the Halifax showed annual house price inflation at a more than four-year low of 2.1% in the three months to July, while it was limited to 2.9% on the Nationwide’s measure in July.

House keys (PD)

Outlook for house prices

House prices look unlikely to rise by more than 2% over 2017, and could be essentially flat over 2018.

The fundamentals for house buyers are likely to remain weak over the coming months with consumers’ purchasing power continuing to be squeezed by inflation running higher than earnings growth. Additionally, housing market activity is likely to be hampered by weakened consumer confidence and limited willingness to engage in major transactions.

Housing market activity and prices are also likely to be pressurised by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house price to earnings ratio reached 5.80 in December (the highest level since August 2007) and was still as high as 5.65 in July. This is well above the long-term (1983-2017) average of 4.19. Furthermore, mortgage lenders are under pressure from the Bank of England to tighten their lending standards. 

The downside for house prices should be limited markedly by the shortage of houses for sale. High employment and very low mortgage rates are also currently supportive.

There is a possibility that potential house buyers may also be concerned by the Bank of England (BoE) indicating that interest rates could eventually rise more than the markets currently expect, although the likelihood of a near-term hike has seemingly receded. While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since mid-2007 could have a significant effect on housing market psychology.

Consumer credit growth essentially stable in July

UK Finance also indicated consumer credit growth was essentially stable in July, and has come off its recent highs.

Annual growth in consumer credit was reported little changed at 2.0% in July having dipped to 1.9% in June from 2.1% in May and 3.0% in April.

The growth rate in credit card lending eased to 5.3% year-on-year (y/y) in July, which was down from 5.5% in June and May, and 6.4% in April.

Meanwhile, personal loans & overdrafts were reported to have fallen 0.9% y/y in July after a fall of 1.3% in May.

Slowing consumer credit growth will be welcomed by the BoE

Signs that growth in consumer borrowing may well have peaked will be of significant relief to the BoE. The BoE sees the recent uptrend of consumer borrowing as a significant risk to the economy and has warned that banks risk become complacent in their lending behaviour. The latest credit conditions survey did at least indicate that banks are becoming more cautious in their behaviour by making less unsecured credit available to consumers and tightening lending standards.

It may well be that heightened uncertainties over the outlook and increased concerns over personal finances are encouraging some consumers to be more cautious in their borrowing. Indeed, consumer confidence fell back further in July to be at the lowest level for a year.

However, the increased squeeze on consumer purchasing power has also likely increased the need for some consumers to borrow.

In their borrowing decisions, consumers need to take on board the fact that the BoE will sooner or later raise interest rates. While any interest rate hikes would be limited and gradual, even small increases could cause problems for many consumers given high borrowing levels.

The BoE wants banks to provide evidence that they are lending responsibly to consumers and have not become complacent, but has stopped short of tightening borrowing controls. The BoE’s Financial Policy Committee (FPC) has reversed the cut in the banks’ countercyclical capital buffer (from 0.5% to zero) it previously announced last July. The buffer increases the capital that banks have to hold against their loan portfolio and it will increase it further to 1% in November, providing there is no change in the economic outlook.

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