BoE Mortgage Lending (April 23)

The renewed decline in mortgage approvals in April will have dashed hopes that the jump in March marked the start of a recovery. Moreover, with mortgage rates now on their way back up, lending is likely to remain weak throughout the second half of the year.

The fall in mortgage approvals for house purchase, from 51,488 in March to 48,690 in April, was weaker than the consensus forecast that approvals would edge higher to 53,000. The drop suggests that the 18% m/m jump in March reflected pent up demand due to moves delayed from last autumn after “mini” budget caused mortgage rates to spike. The decline in April left approvals a quarter down on the typical level before the pandemic and leaves our forecast that approvals will fall by almost 30% y/y from 752,000 in 2022 to 540,000 in 2023 broadly on track.

The rise in the average rate on new mortgages advanced slowed, only increasing by 5 basis points to 4.46% after a 17bp increase in the previous month reflecting the drop in quoted mortgage rates in recent months. The average rate on all outstanding mortgages remained strikingly low at 2.75% in April, showing that fixed rates mean that most borrowers have not yet felt the impact of higher interest rates. In our view, that helps explain why the economy has held up better than expected to date too.

Overall, the still-low level of mortgage approvals in April showed that, even with mortgage rates below 5%, many would-be buyers were priced out of the market. Upwardly revised expectations for Bank Rate, following the worrying inflation data released last week, mean mortgage rates will rise back above 5% imminently, and based on our forecasts will reach a peak of 5.7% in early 2024. (See here.) If so, demand will take a further leg down, resulting in a further drop in lending volumes from already-depressed levels.