Mortgage Lending Fell to Three-Year Low after Interest Rate Hike

Britain’s housing market lost momentum last month, as mortgage lending dropped to its lowest level in almost three years, following the Bank of England’s (BoE’s) first interest rate hike since the global financial crisis.

At the same time, lending to consumers – something that the BoE is watching closely – sped up for the first time in four months.

Britain’s economy lagged behind stronger growth in much of the world last year, as the rise in inflation triggered by June 2016’s Brexit vote and weak wage growth ate into households’ disposable income.

Mortgage Lending Fell to Three-Year Low after Interest Rate Hike

The latest data, from the BoE, showed the greatest increase in the interest rate on existing mortgages since 2010. That spells further weakness in the housing market during 2018, when the BoE is expected to raise interest rates again, economists believe.

“While the increase in interest rates in November was just 0.25% and mortgage rates are still at historically very low levels, there does appear to have been some impact on house buyers’ psychology,” notes Howard Archer, of economic consultant EY Item Club.

The BoE will signal next week whether it is likely to raise interest rates again in May, or wait for clearer signs of what kind of trade deal Theresa May is likely to extract from the EU.

A Government report seen by Buzzfeed on Monday showed that Britain will be worse off under each of the three broad scenarios for the country’s future relations with the EU than if we’d have stayed.

The BoE report shows that the level of mortgage lending for house purchase in December dropped to 61,039 – the lowest since January 2015 – down from 64,712 in November.

However, consumer lending increased by a stronger than expected £1.52 billion in December, pushing up the yearly growth rate to 9.5%, from November’s 9.3%.

Consumer credit growth had been slowing gradually since it peaked at almost 11% in November 2016.

Net mortgage lending also rose by a stronger than expected £3.68 billion.

The BoE has confirmed that there is no British debt bubble, but has told banks to set aside more money against the risk of bad loans.

After a Christmas holiday marked by tight consumer spending, there were signs that households felt a bit more optimistic in early 2018, possibly encouraged by signs that inflation has peaked and wage growth might gather pace.

John Eastgate, the Sales and Marketing Director of OneSavings Bank, comments on the data: “The ongoing state of political and economic uncertainty continues to weigh heavily on consumer confidence, and anyone wavering on a decision to apply for a mortgage may well have been dissuaded from doing so by the base rate increase, so it is hardly surprising that approvals decreased.

“The removal of Stamp Duty for first time buyers is unlikely to make a material difference, and, with low wage growth and higher inflation, it would be fair to expect a generally subdued tone to continue. Renting remains the only viable option for many, and it is important that the Government should recognise the importance therefore of the private rented sector.”