UK mortgage lending is forecast to record decade-low growth during this year and next, according to EY Item Club.
In its latest Outlook for Financial Services report, the economic forecasting group predicts net mortgage lending will grow just 1.5 per cent in 2023 and two per cent in 2024. This would mark the lowest growth over a two-year period in a decade.
The firm forecasts only marginally higher growth of 2.8 per cent (net) in 2025, well below the three per cent averaged during the pre-pandemic years of 2015 to 2019.
The predictions come alongside an expected rise in default rates.
Barriers to borrowing
The report said that, as mortgage rates reach their highest level since 2008, economic growth “remains subdued and weakening housing market sentiment drives down demand”.
It pointed to the continued pressure of high interest rates and inflation alongside a “weaker-than expected” labour market. And the group of economists reckon this will drive “sluggish” GDP growth for the rest of 2023 and into 2024.
The uncertainty caused by the current developments in the Middle East, as well as the ongoing war in Ukraine, add a “downside risk” to the forecast.
EY Item Club added there was a risk of further falls in confidence and appetite to borrow in the short-term.
Subdued housing market sentiment and higher borrowing costs led net mortgage lending to average just £0.3bn per month from January to September 2023. This compares to £5.7bn in same period in 2022, at a time when mortgage approvals were around 40 per cent higher.
However, the economists expect mortgage demand to pick up over 2024 and 2025 as long as “inflation continues to fall, the Bank of England cuts interest rates next year, and housing affordability improves”.
Defaults on the up
Unsurprisingly, default rates are rising, but should remain well below historic peaks.
EY Item Club noted that higher mortgage rates have triggered a small rise in impairments, with write-off rates forecast to rise from 0.002 per cent of total mortgage loans in 2022 to 0.015 per cent this year and just over 0.02 per cent in 2024 and 2025.
This would be the highest level of defaults since 2015, but well below the peak of 0.08 per cent after the 2009 financial crisis.
Dan Cooper, UK head of banking and capital markets at EY, said: “The ‘higher for longer’ borrowing rates and ongoing cost of living pressures are continuing to have a very real impact on customers, and at the same time, banks are tightening their lending criteria.
“Firms are also watching impairment levels closely, particularly as fixed rate mortgages roll onto higher interest rates.”
Stuart Gregory, managing director of broker, Lentune Mortgage Consultancy, added: “These figures are not a surprise to me, as we’ve seen demand for mortgages drop off a cliff in recent months.
“It’s about time the Bank of England opened its eyes and realised the impact of its actions. Needless to say, I’m sure Jeremy Hunt will be along shortly with something to try to reverse this trend as the Treasury also realises its revenues have dropped.”