Depressed UK mortgage approvals further evidence of weak demand

(Alliance News) - Despite the higher-than-expected mortgage approvals figures in February, data suggests prospective UK home buyers are still waiting for property prices to fall and mortgage rates to come down.

According to the Bank of England, net mortgage lending to individuals fell to GBP700 million in February from GBP2.0 billion in January, hitting its lowest level since July 2021.

However, net mortgage approvals increased for the first time since August 2022, reaching 43,500 in February, compared to 39,600 the month before. However, this was still weak compared to the 71,000 approvals a year before.

Across 2015 to 2019, net mortgage approvals have averaged around 66,500.

"The continued weakness of house purchase mortgage approvals in February confirms that buyers are waiting for affordability to improve, either via a large correction in house prices or a larger fall in mortgage rates than seen to date, before re-entering the market," said Samuel Tombs, Pantheon Macroeconomics chief UK economist.

According to the Royal Institution of Chartered Surveyors earlier this month, the proportion of property professionals seeing new buyer inquiries fall still outweighed those seeing increases.

Tombs believes this "suggests that demand will remain very weak over the coming months".

Potential home buyers are feeling cautious about the potential rising mortgage rates. In February, the effective interest rate on newly drawn mortgages, meaning the actual interest rate paid, increased to 4.24% from 3.88%.

In February 2022, the effective interest rate stood at just 1.59%.

The BoE's own benchmark interest rate is currently 4.25%, following a 25 basis point hike last week. However, it was 4.00% for nearly all of February, suggesting mortgage rates still have further to climb in the coming months.

"With mortgage rates unlikely to fall much further in the near term, lending will remain weak. Our forecast is that approvals will be 30% lower this year than in 2022," said Capital Economics analyst Andrew Wishart.

"The risk of a renewed rise in mortgage rates, or a reduction in the supply of secured credit, now looms large," Pantheon's Tombs said.

By Elizabeth Winter, Alliance News senior markets reporter

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