UK housing market remains lacklustre as the British Bankers' Association (BBA) reports mortgage approvals at 9-month low in June. The housing market is 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 are expected to be essentially flat over 2018. The BBA also reported a further easing back in consumer credit growth in June, which will be welcomed by the Bank of England.

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

There has been no let-up in evidence that housing market activity is being pressurised, with the BBA reporting that mortgage approvals for house purchases slowed for a fifth successive month in June to be at a nine-month low. At 40,200 in June, mortgage approvals were 9.3% below January’s peak level of 44,318.

Stuttering housing market activity has recently been weighing down on house prices. June data from the Halifax showed annual house price inflation at a more than four-year low of 2.6% in the three months to June, while it had been limited to a 47-month low of 2.1% on the Nationwide’s measure in May before rising to 3.1% in June.

House for sale (PD)

Outlook for house prices

House prices look unlikely to rise by more than 2% over 2017, and are expected to 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. It is also very possible that the labour market will increasingly falter despite its current resilience. Additionally, housing market activity is likely to be hampered by soft consumer confidence and a limited willingness to engage in major transactions. Confidence will likely be impacted not only by weakened purchasing power, but also by heightened uncertainty alongside economic and political difficulties.

Potential house buyers may also be concerned by recent signs that the Bank of England could be near to hiking interest rates (although this looks less likely after the June dip in inflation). 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.

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. 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 currently still supportive.

Consumer credit growth slowed in June

The BBA also indicated that there was a further slowdown in consumer credit growth in June. The growth rate in credit card lending was reported to be stable at 5.5% year-on-year (y/y) in June, which was down from 6.4% in April. Meanwhile, personal loans and overdrafts were reported to have fallen 1.3% y/y in June after a fall of 0.8% in May and being flat in April.

Annual growth in consumer credit was reported to have fallen back to 1.9% in June from 2.1% in May and 2.8% in April. This data is different from previous data, which had shown consumer credit growth slowing to 5.1% in May from 6.3% in April and a peak of 7.2% in October 2016.

Slowing consumer credit growth will be welcomed by the Bank of England

Evidence of slowing growth in consumer borrowing will be of some relief to the Bank of England. The Bank sees the recent uptrend of consumer borrowing as a significant risk to the economy. The latest credit conditions survey indicated 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. However, the increased squeeze on consumer purchasing power has also likely increased the need for some consumers to borrow.

The Bank of England 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 Bank of England’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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