Rising mortgage approvals points to recovering housing market

02 April 2024

The larger than expected jump in mortgage approvals points to both rising demand and rising house prices in the coming months. What’s more, falling consumer credit growth is probably because real incomes are rising strongly rather than consumers becoming more cautious. 

Recovering housing market 

The increase in mortgage approvals from 56,100 to 60,400, the fifth consecutive increase and the highest level since September 2022, suggests that life may be starting to return to the housing market.

Indeed, now that attention has firmly turned to when interest rates will start to fall, mortgage rates have started to drop. The effective interest rate on new mortgages continues to fall for most tenures. What’s more, competition in the mortgage market remains intense. A lender is now prepared to cover 99% loan-to-value mortgages, enabling buyers to purchase their first home with just a 1% deposit.

As a result, the housing market is likely to stabilise and prices will probably start to rise from Q2, supported by an increase in real incomes. A gradual rebound in housing transactions will also support an economic recovery later this year. This is another reason, in addition to the usual month-to-month volatility in house price indices to see the fall in the Nationwide house price index in March as a blip.

However, around 1.5 million households are expected to see an increase in repayments this year as fixed-rate mortgage deals expire, according to our estimates. That still represents a significant headwind to the housing market even as the rout may be ending.

Slowing consumer credit not a concern

Meanwhile, the drop in consumer credit from £1.8bn to £1.4bn isn’t too concerning. The decline was mainly concentrated in credit card spending, which fell from £0.8bn to £0.5bn, but we know spending on retail goods was flat in February so this could reflect rising real incomes meaning consumers have to rely less on credit cards. Households also seem to be paring back their saving rate as mortgage rates decline. Households increased their total liquid asset holdings by £5.5bn in February, down from £5.8bn in January and a peak of £7.5bn last October.

One potential sour note is that non-financial firms paid back significant amounts of capital (-5.1bn) suggesting that firms are focusing on reducing debt amounts in response to high interest rates rather than investing.

Our base case is that the recession at the end of last year is already over. Growth will pick up in the first half of the year, but the second half of the year should see a big improvement as inflation fall sharply, interest rates start to be cut and households real incomes continue to rise. That should set the scene for a return to more robust levels of growth in the second half of 2024.

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