The UK economy has recovered faster from the Covid-19 pandemic than previously estimated, according to the latest official figures. However, the mortgage market has shown signs of slowing down, as high interest rates and affordability challenges have dampened demand for home loans.
UK GDP revised up in Q2
The Office for National Statistics (ONS) announced on Friday that the UK gross domestic product (GDP) was 1.8% above its pre-pandemic level by the second quarter of this year, up from an earlier estimate of 0.2% below. This means that the UK economy has performed better than Germany and France, which were 0.2% and 1.7% above their pre-pandemic levels respectively.
The upward revision was mainly driven by stronger growth in the services sector, which accounts for about 80% of the UK economy. The ONS said that the easing of lockdown restrictions in April and May boosted consumer spending, especially in hospitality, retail and transport.
The ONS also revised up the annual growth rate for 2022 from 9.8% to 10%, making it the fastest expansion since records began in 1949. However, the ONS cautioned that the UK economy still faced significant uncertainties due to the ongoing impact of the pandemic and supply chain disruptions.
Mortgage approvals hit six-month low in August
While the UK economy has bounced back faster than expected, the mortgage market has cooled down significantly in recent months. The Bank of England (BoE) reported on Friday that mortgage approvals fell to a six-month low of 75,200 in August, down from 80,300 in July and well below the peak of 103,400 in November last year.
Mortgage approvals are an indicator of future housing market activity and demand. The decline in August suggests that the housing market has lost some of its momentum, as buyers face higher borrowing costs and tighter lending criteria.
The BoE has raised its benchmark interest rate three times since June, from 0.1% to 0.75%, to curb inflation and support the economic recovery. This has pushed up mortgage rates to their highest levels since 2009, making it more expensive and difficult for borrowers to secure a home loan.
According to Moneyfacts Group Plc, the average five-year fixed-rate mortgage dropped below 6% for the first time since July on Thursday, but it was still much higher than the 3.5% rate seen in early 2022. The average two-year fixed-rate deal also dipped to 6.5%, but it was still well above the 2.5% rate seen a year ago.
Housing affordability worsens amid rising prices and costs
The slowdown in the mortgage market has also been affected by the worsening housing affordability situation in the UK. House prices have risen sharply over the past year, driven by strong demand, low supply and government support schemes such as the stamp duty holiday and the Help to Buy equity loan.
According to Zoopla, house prices increased by 7.6% year-on-year in August, reaching a record high of £266,000. However, this was lower than the 8.7% annual growth seen in July, indicating a moderation in price inflation.
Zoopla said that higher mortgage rates have reduced buyers’ purchasing power by more than 20% compared to early 2022, making it harder for them to afford a home. The property portal also said that house prices have not fallen enough to improve affordability and boost activity.
A survey by KPMG released on Thursday showed that almost a quarter of British mortgage holders are considering selling and moving to a cheaper property due to the surge in financing costs. The survey also found that almost a fifth of mortgage holders are using their savings to cover their home loan payments.
Richard Donnell, Zoopla’s executive director, said that falling mortgage rates are the most likely route to improving housing affordability and bringing buyers back into the market in the next 12 to 18 months.