In recent years, the housing market has been a beacon of light even in the face of the most severe economic headwinds. But new data from the Bank of England suggests that activity in the housing market is starting to slow down. According to the latest figures, mortgage approvals for house purchases fell from 69,531 in March to 65,974 in April.
Meanwhile, net mortgage borrowing dropped from £6.4 billion to £4.1 billion – a slump of more than a third.
So what’s behind these figures?
Well, inflation is now at its highest level in four decades, and rising costs recently prompted the Bank of England to raise interest rates to 1%. The Bank also expects inflation to pass the 10% mark and for the economy to slip into recession before the end of the year.
As Hina Bhudia, partner at Knight Frank Finance, said: “Activity among purchasers is ebbing as the cost of living squeeze shrinks the pool of buyers.”
Speaking to Sky News, Ms Bhudia noted many people are also looking to refinance existing mortgages in order to beat rising interest rates.
“Rates on certain products have doubled in the past 12 months and there is a real sense of urgency among many borrowers who sense they must act soon or reassess what they can afford,” she stated.
Jeremy Leaf, former residential chair of the Royal Institution of Chartered Surveyors, also believes the cost of living crisis is behind the recent slump in mortgage approvals, which he described as a “good lead indicator of housing market direction”.
“This latest reduction confirms what we have been seeing at the sharp end over the past few months – successive monthly increases in the cost of living as well as interest rates are compromising confidence to take on additional debt and having an inevitable knock-on effect on price growth,” he commented.
Mr Leaf went on to state that with available housing remaining in short supply, significant changes in prices are “unlikely”. However, he pointed out that as there is less competition, it is taking longer to exchange contracts in many cases.
House price growth slows down
During the same month in which mortgage approvals and borrowing fell, house price growth slowed down. According to Nationwide, house prices went up by 11.2% in May year-on-year, compared with 12.1% a month earlier.
So while property values are still rising, even in the face of huge inflationary pressures, momentum appears to be easing.
Nevertheless, the same data shows that house prices still went up for the tenth consecutive month during May, meaning the average property in the UK now costs £269,914.
Like Mr Leaf, Nationwide cited a shortage of housing stock as one factor behind the continued strength of the housing market, despite “growing headwinds from the squeeze on household budgets”, as well as rising interest rates.
Robert Gardner, chief economist at Nationwide, now predicts the housing market to continue to slow down over the next few months.
“Household finances are likely to remain under pressure, with inflation set to reach double digits in the coming quarters if global energy prices remain high,” he said.