Decade-low mortgage growth forecast amid high mortgage costs and sluggish demand

by The Technical Blogs

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UK mortgage lending is expected to record decade-low growth in 2023 and 2024, an economic forecaster is predicting.

Overall, mortgage loans in 2023 are expected to rise just 1.5% net and 2% net in 2024, representing the lowest growth over a two-year period in a decade, according to the  EY ITEM Club Outlook for Financial Services.

It pointed to high mortgage rates, subdued economic growth and weakening housing market sentiment.

The EY ITEM Club expects mortgage demand to pick up over 2024 and 2025 – provided inflation continues to fall, the Bank of England cuts interest rates next year, and housing affordability improves. Overall, mortgage lending is forecast to grow by 2.8% in 2025.

These figures remain very low in historical terms and sit far below the 3% averaged during the pre-pandemic years of 2015 to 2019, the report said.

Significant cost-of-living pressures continue to affect households’ ability to spend, and an increasing number are finding it difficult to keep up with loan repayments

Anna Anthony, EY

As well as sustained headwinds in the UK economy, the forecaster also said that developments in the Middle East and the ongoing war in Ukraine present an ongoing downside risk to the forecast, with a very real potential of further falls in consumer and business confidence and appetite to borrow, at least in the short-term.

Anna Anthony, UK financial services managing partner at EY said: “The UK is still on track to avoid recession this year, but the economic environment remains challenging.

“Significant cost-of-living pressures continue to affect households’ ability to spend, and an increasing number are finding it difficult to keep up with loan repayments.

“At the same time, businesses’ appetite to borrow and invest has been affected by high borrowing rates. This slowdown in the flow of capital is being felt across the country; from individuals pulling back on daily expenses and putting off home-buying plans, through to banks and asset managers managing low growth portfolios.

“Escalating geopolitical tensions around the world are another cause for concern, and it will be prudent for financial institutions to be prepared for further dips in consumer and business confidence, and to ensure they are doing all they can to support customers through these challenging times.”

Looking at consumer credit, net non-mortgage lending is forecast to rise by 6.1% in 2023, which would be the strongest growth since 2017, in part driven by a fall in repayments in recent months.

The EY ITEM Club predicts non-mortgage borrowing lending growth will slow to 5% in 2024 and 4.3% in 2025.

The combination of tighter regulation imposed post-2008, additional support from lenders, and household savings built up during the pandemic should help keep defaults to a minimum

Dan Cooper, EY

Write-off rates on consumer loans have not yet been significantly affected by higher interest rates or a subdued economy, the report said.

Bank-to-business lending is forecast to contract by 0.5% net this year, as economic challenges and high borrowing costs dampen businesses’ appetites to borrow.

Growth is forecast to return in 2024 at 1.8%, and the EY ITEM Club expects a larger rise of 3.7% in 2025 as the economic climate is expected to improve.

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.

“However, the combination of tighter regulation imposed post-2008, additional support from lenders, and household savings built up during the pandemic should help keep defaults to a minimum.

Banks are actively working to retain a strong capital position and support their customers in this challenging market.

“With interest rates now expected to peak at a lower level than previously predicted, we should see a gradual improvement in consumer and business confidence over the next two years, leading to greater appetite to borrow.”

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