UK Mortgage Approvals Plummet to Lowest Level Since January
Official data from the Bank of England reveals a sharp decline in UK mortgage approvals in September, reaching their lowest point since January 2023. This downturn is attributed to the impact of high-interest rates on lending, and it comes just days before the Bank of England is set to decide whether to raise interest rates.
According to figures released by the central bank on Monday, net mortgage approvals for house purchases dropped to 43,300 last month, down from 45,400 in August. This number fell below economists' expectations of 45,000 and marked a 35% decline from September 2019, before the onset of the pandemic.
Additionally, net approvals for remortgaging also experienced a significant decrease, falling to 20,600, the lowest level since January 1999. These contractions coincide with the Bank of England's announcement that the average rate on new mortgages exceeded 5% in September for the first time since 2008.
Policymakers have been aggressively raising interest rates, increasing them from an all-time low of 0.1% in November 2021 to the current rate of 5.25%, with the aim of curbing inflation. However, these steep borrowing costs have started to impact economic activity negatively, leading to stagnant output over the past year. The latest data suggests that this economic weakness is likely to persist.
Ashley Webb, an economist at consultancy Capital Economics, noted, "The further decline in bank lending in September will continue to weigh on activity, particularly in the housing market. This is consistent with our view that a mild recession may already be underway and it supports our view that the Bank of England will leave interest rates on hold at 5.25% on Thursday."
Markets widely anticipate that the central bank's Monetary Policy Committee will maintain interest rates at 5.25%—the highest level since the 2008-09 financial crisis. This decision is informed by increasing signs of weakness in economic activity and diminishing price pressures.
The latest Bank of England figures reinforce this view, revealing a 4.2% contraction in annual growth in the amount of money in the UK economy (M4ex) in September, the most significant decline since records began in 2010. The data also shows a slowdown in annual growth in money supply for households, down to 0.8% in September, the lowest level since records began in 1998.
Furthermore, the central bank's data indicates a reduction in consumer borrowing, with households cutting spending as it fell from £1.7 billion in August to £1.4 billion in September. Households have also been transferring funds in search of higher returns, withdrawing a net £0.7 billion from banks and building societies in September. This shift is driven by large withdrawals from instant access accounts, which offer lower interest rates, in favor of accounts with more favorable rates.
In a related development, households' net deposit flows into National Savings & Investments surged to £7.7 billion in September, the highest level since August 2020. This increase follows the state provider's decision in August to raise the interest rate on its one-year fixed bonds from 5% to 6.2%.
Thomas Pugh, an economist at consulting firm RSM UK, predicts that the economy will "stagnate with little to no growth over the next year." He also warns that the lagged effects of the substantial interest rate increases, combined with the risk of further rate hikes, could potentially push the economy into recession later this year or in early 2024.