Homeowners are downsizing their property aspirations as they adapt to higher mortgage costs and steep house prices.
The amount of money borrowed to purchase homes dropped from £2billion to £0.7billion in February – the lowest level of net borrowing since April 2016.
But new data from the Bank of England also showed the number of mortgages which had been approved for house purchases increased to 43,000 from 39,600 in January. This was the first monthly hike since August 2022.
So, whilst the number of homes purchased with mortgages went up, the amount of money being borrowed by these homeowners decreased.
This begs the question, what does this mean for the homeowners and the housing market?
According to Alice Haine, personal finance analyst at Bestinvest, the DIY investment platform and coaching service, this means borrowers are targeting smaller, more affordable homes which fit better with their budgets.
“House price data has been mixed of late,” Haine explained, “with one index reporting a surprise rise in the value of an average home in February and others reporting declines.
“But while mortgage approvals are up – signalling that consumer appetite for house buying is still intact – net borrowing of mortgage debt presents a different picture with a sharp decline in February, a reflection of buyers downsizing their target homes to meet affordability criteria.”
Haine added: “Affordability has become a major challenge for first-time buyers and those looking to refinance thanks to the burden on disposables incomes imposed by higher borrowing costs, sticky inflation and falling real wages.”
What are the prospects for the housing market?
Mortgage rates and prices directly impact the housing market as higher rates mean people are less likely to move home.
Although mortgage rates are not as high as they were during the crisis in September last year, the Bank of England has continued to hike the base rate. What’s more, anyone taking out a mortgage now will find prices are still much higher than they were over a year ago.
Many potential buyers may be holding off buying a home whilst they wait for interest rates to stabilise and fall.
Karen Noye, mortgage expert at Quilter: “The effective interest rate on newly drawn mortgages increased by 36 basis points to 4.24% in February, making borrowing more expensive for potential homeowners and will likely still continue to mean approvals are depressed as people adopt a wait and see approach at least in the short term.
“However, it’s clear that home buyers are cautiously returning back to the market in early 2023 after the huge shocks at the back end of last year made many put their house hunts on ice.
“How this all feeds through to house prices is yet to be seen. At present we have seen a few minor drops in prices but they have remailed relatively resilient as of yet.
“How prices progress towards the end of the year will depend on how volatile the economy is, the speed at which inflation comes down and how much further the Bank of England go with interest rate increases.”
