Slump in mortgage demand just the start

Consumers are struggling and behaving more cautiously in the face of the impending recession, with many saving more and almost certainly reducing their total spending.

The jump in consumer credit to £1.5bn in November suggests that consumers are turning to credit cards to maintain spending. However, this figure partly reflects a catch up from the previous two months of extremely small increases in borrowing, and will also include some of the early Christmas spending. In any case, with inflation running at 10.7% and retail sales volumes falling by 0.4% month over month in November, it seems that the increase in borrowing was eaten up by inflation.

What’s more, households deposited an additional £5.4bn into savings accounts in November. This is compared to £6.3bn in October, and the average monthly net flow of £5.6bn during the past six months. This suggests that very weak consumer confidence is still prompting households to spend less and save more in anticipation of the challenging economic times ahead.

All this is further evidence that the UK is already in recession and will probably remain so until late 2023. Expect the recession to have started in Q3 2022 and to most likely last until Q3 2023, with a peak-to-trough drop in GDP of about 2.5% – making it a similar size to the recession during the early 1990s.

In November, households continued to stockpile cash at a faster-than-normal rate in response to fears of rising unemployment, higher interest rates and the recent decline in the value of their total financial assets. The stock of households’ savings is now £192bn above the level it would have reached if they had continued to add to them at the 2018-to-19 average rate since January 2020. (See Chart.)

Higher interest rates hitting house purchases hard

Approvals for house purchases, an indicator of future borrowing, decreased significantly to 46,100 in November, from 57,900 in October and a peak of 74,425 in August. This dramatic slowdown in the housing market is due to the ‘effective’ interest rate – the actual interest rate paid on newly drawn mortgages in November – increasing by another basis points to 3.35% in November. Given that new mortgages are running at around 6% this is likely to continue to increase over the next few months leading to a further slump in new mortgage approvals, and eventually to around a 10% drop in house prices.

However, there are three reasons why a house price slump should not be a huge concern to the market:

• the huge growth over the last two years;
• the strength of household balance sheets; and
• the tightness in the labour market.

Middle market borrowing remains subdued

There is evidence that businesses are exercising more caution in their borrowing decisions. UK non-financial businesses borrowed net £1.9bn in November. Within this, large non-financial businesses borrowed net £2.2bn in November. But small and medium sized non-financial businesses (SMEs) repaid net £0.2bn in November. However, in spite of this more cautious borrowing behaviour, our Q4 Middle Market Business report found that 44% of middle market businesses are planning to borrow more over the next six months.