Why is house purchase activity down this year?

Borrowing for house purchases fell in the second quarter of this year compared with activity levels a year ago, according to trade body UK Finance.

In its Household Finance Review for Q2 2022, UK Finance said the drop in house purchase activity is “in line with expectations” as Q2 2021 saw greatly elevated activity levels as borrowers rushed to complete before the end of the second phase of the Stamp Duty holiday.

Home-mover activity, as also expected, showed a materially greater year-on-year contraction, reflecting the much larger demand boost to home-movers from the Stamp Duty holiday.

Growth in overall mortgage application levels – a forward indicator of mortgage completions in the following quarter – began to turn negative year-on-year through Q2.

Read more: Residential activity drops in August – RICS.

UK Finance, however, forecasts that house purchase lending activity will revert to broadly the pattern seen before the pandemic took hold, following the distortions seen over the last two years.

“In Q2, activity levels followed a near-identical pattern to that seen in 2019, in line with our earlier forecasts and narrative,” the trade association for the UK banking and financial services sector stated in its report. “At present, it is too early to predict when escalating cost-of-living pressures will begin to bear down on effective demand but, given current pressures from interest rates and inflation, some softening of demand is expected, whether this comes later in 2022 or next year.”

It added that increased inflation and interest rates mean the average borrower looking to refinance this year would see a substantial reduction to their disposable income.

UK Finance said that, on average, homeowners seeking to refinance can expect to see a reduction of just under 11% of their disposable income. This would leave the average consumer with around one quarter of their net income left over after refinancing.  

For households in the lowest income brackets, these borrowers could face a smaller range of refinancing options, as they may fall short of some lenders’ Financial Conduct Authority-mandated income-expenditure affordability tests. However, most customers will be able to refinance on the open market or refinance on to a new deal with their existing lender, according to UK Finance.  

“As we head into the autumn, the pressure on household finances will increase and we anticipate a drop in consumer spending and house-buying activity,” Eric Leenders, managing director of personal finance at UK Finance, said.

Krishnapriya Banerjee, managing director at Accenture’s UK banking industry group, added that the impact of rising interest rates and inflation is starting to be felt across the UK.

“Financial literacy, especially of younger consumers, takes on a heightened importance during this challenging time and financial services can help their customers make informed financial decisions through the right combination of digital tools and human-centric services,” Banerjee said. “Now is the time for lenders to continue to respond with empathy, using customer insights and data analytics to anticipate customer needs and take proactive action.”

Read more: Support from brokers and lenders will be crucial in cost-of-living crisis.

Vikki Jefferies, proposition director at PRIMIS Mortgage Network, said that while borrowing has dropped for house purchases, she expects remortgage and buy-to-let activity to remain buoyant for the rest of the year.  

“With today’s data showing elevated pressures on household budgets, advisers can support consumers by offering a range of flexible products that will enable them to maximise their assets to enhance their finances in the long-term,” she said. “However, given approximately £100 billion of mortgages are set to mature by the end of 2022, brokers will have an extremely busy pipeline of business in the coming months, and they will certainly be stretched. It will be vital to provide them with proactive and sustained support.”