US Edition
Rising interest rates slammed the brakes on the housing market last month as mortgage approvals slumped and growth in debts slowed to the weakest level in almost a decade.
Banks and building societies approved just under 49,500 mortgages for home purchase in July, according to the Bank of England, the lowest number since February and down from more than 63,000 a year ago.
Mortgage debt has been effectively flat at £1.63 trillion since the end of last year as new loans are offset by repayments.
Home loan debts are up just 1.5pc compared with July 2022, the smallest annual increase since early 2014 when banks and the housing market were still recovering from the financial crisis.
Activity has ground lower after repeated interest rate rises by the Bank of England. The Base Rate reached 5pc in June and was increased again to 5.25pc in August.
The typical new mortgage came with an interest rate of 4.66pc last month, up from 2.33pc a year earlier, according to the Bank.
Thomas Pugh, economist at RSM, said the rise in rates was pushing down on house prices and on wider economic activity.
“Interest rates on new mortgages have now stabilised, but they remain at the highest level since the financial crisis,” he said, predicting an overall drop in house prices of 10pc.
“Our base case is that the economy continues to stagnate with little to no growth over the next year, but the lagged effect of the huge rise in interest rates that has already happened, combined with the risk of further rate rises, could easily tip the economy into recession later this year or in early 2024.”
Bank of England figures showed savers have also made the most of rising interest rates by moving more than £10bn into fixed-term accounts, which offer better returns than instant access accounts.
The typical instant access account offers a rate of 1.66pc, up from 1.46pc in June but still far lower than the rates charged to mortgage borrowers.
By contrast the average term deposit, in which savers agree to lock their money away for a fixed period of time, pays a rate of just short of 5pc, according to the Bank of England.
Overall, the amount of cash held in the bank by households barely budged, rising by 1.6pc on the year – the smallest annual increase since the Bank’s comparable records began in 1998.
Combined with a slowdown in consumer borrowing, as families eased off using credit cards and other forms of loans, Ashley Webb at Capital Economics said it “may suggest that households’ finances are becoming more stretched.”
He said: “The drag from higher interest rates is starting to weigh more heavily on activity.
“What’s more, we think bank lending and economic activity will weaken further this year as the Bank raises interest rates to a peak of 5.5pc in September and keeps them high until the second half of 2024.”