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Antony Antoniou – Luxury Property Expert

Mortgage approvals tumble as interest rates rocket

Mortgage approvals tumble as interest rates rocket

The Impact of Soaring Interest Rates on the Housing Market: Mortgage Approvals and Debt Growth Plunge

The housing market is no stranger to the ebb and flow of economic tides, and the recent surge in interest rates has sent shockwaves through the sector. Mortgage approvals have taken a steep tumble, while the growth of home loan debts has reached its feeblest point in nearly a decade. As the financial landscape shifts, prospective homeowners and real estate enthusiasts are left grappling with the repercussions of this economic twist.

Mortgage Approvals Hit a Low Point

In a stark reflection of the impact of rising interest rates, the Bank of England’s data reveals that just under 49,500 mortgages for home purchases were approved in July. This number marks the lowest count since February and a stark drop from the more optimistic figure of over 63,000 approvals registered just a year ago. The cooling of the housing market comes as no surprise given the significant increase in mortgage interest rates.

Debt Growth Crawls at a Snail’s Pace

The growth in mortgage debt has effectively plateaued at £1.63 trillion since the close of the previous year. New loans are essentially being balanced out by repayments, causing the debt growth to stagnate. In comparison to July 2022, home loan debts have only inched up by a mere 1.5%. This sluggish growth is the smallest annual increase witnessed since early 2014, when both banks and the housing market were still in the throes of recovery from the financial crisis.

The Toll of Interest Rate Hikes

The relentless ascent of interest rates, guided by the Bank of England, has cast a shadow over the housing market’s vitality. The Base Rate, which climbed to 5% in June, was further propelled to 5.25% in August. These successive hikes have had a profound effect on mortgage interest rates. The average new mortgage in the recent month bore an interest rate of 4.66%, a considerable leap from the 2.33% recorded just a year earlier.

Economic Ripples and Predictions

Experts suggest that the ripple effect of heightened interest rates extends beyond the housing market. Thomas Pugh, an economist at RSM, asserts that the surge in rates has not only subdued house prices but also left its mark on broader economic activity. Pugh predicts a potential 10% drop in house prices. He also forecasts a period of economic stagnation, with little to no growth over the next year. However, he raises a cautionary flag, indicating that the delayed impact of the substantial interest rate surge, coupled with the looming risk of further increases, could potentially trigger a recession later in the year or early 2024.

Savers Seize Opportunities Amidst Uncertainty

As interest rates climb, savers have seized the opportunity to optimize their returns. More than £10 billion have migrated into fixed-term savings accounts, offering more attractive returns compared to instant access accounts. While the typical instant access account yields a rate of 1.66%, the average term deposit—where savers commit to locking their funds for a specified duration—boasts an interest rate just shy of 5%, as reported by the Bank of England.

Economic Landscape: Households, Borrowing, and More

The financial landscape has undergone noticeable shifts beyond the housing market. Despite the rise in interest rates, the amount of cash held by households in banks has experienced a modest increase of 1.6% over the year. Yet, this is the smallest annual rise since the Bank’s records began in 1998. Concurrently, consumer borrowing has decelerated, indicating a trend of reduced credit card usage and other forms of loans. This shift has led experts to speculate that households are facing increased financial constraints.

Looking Ahead: What to Expect

The impact of the soaring interest rates is projected to persist, painting a challenging outlook for the foreseeable future. Ashley Webb at Capital Economics anticipates that the combined forces of bank lending and economic activity will further weaken in the coming months. This prediction aligns with the Bank’s plan to elevate interest rates to a peak of 5.5% in September, keeping them elevated until the latter half of 2024.

In conclusion, the housing market’s response to the surge in interest rates has been palpable and far-reaching. Mortgage approvals have taken a substantial hit, and the growth of home loan debts has been stifled. As economic forces continue to evolve, homeowners, potential buyers, and investors must navigate this intricate landscape with strategic foresight.

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