Mortgage approvals rise as pay outpaces house price growth

UK house prices are higher than they were a year ago, but affordability has also improved and mortgage approvals are up.

As the property market continues to recover, the trajectory of interest rates is set to be a major factor.

Consumer sentiment improving

The average cost of a home stood at £261,142 in March, down 0.2% from February, according to the latest monthly house price index from Nationwide. The annual rate of house price growth edged higher to 1.6% in March, from 1.2% in February.

"Activity has picked up from the weak levels prevailing towards the end of 2023 but remains relatively subdued by historic standards," said Nationwide's chief economist, Robert Gardner.

Highlighting the impact of high interest rates on affordability, Gardner noted that although mortgage rates are below the peaks seen in mid-2023, they remain well above the low rates that prevailed in the wake of the pandemic.

But with cost-of-living pressures easing as inflation comes down, consumer sentiment is improving, Gardner added.

"Indeed, surveyors report a pickup in new buyer enquiries and new instructions to sell in recent months. Moreover, with income growth continuing to outpace house price growth by a healthy margin, housing affordability is improving, albeit gradually.

"If these trends are maintained, activity is likely to gain momentum, though the pace of the recovery is still likely to be heavily influenced by the trajectory of interest rates."

Rate cuts 'on the way'

Although the timing and size of future moves are not yet known, rate cuts may come sooner than expected.

At its last meeting, the Bank of England's Monetary Policy Committee decided to keep the base rate unchanged at 5.25%, the highest level for 16 years. However, governor Andrew Bailey has said that "we are on the way" to a reduction.

"We don't have to actually get inflation all the way back to target... to cut rates for instance, what we have to do is be convinced that it is going there," Bailey told the BBC's economics editor Faisal Islam.

"We do need to see further progress, but I do want to give this message very strongly we have had very encouraging and good news, so I think you know we can say: we are on the way."

Increase in mortgage approvals

Monthly data released by the Bank of England last week showed that lenders approved 60,400 mortgages for house purchases in February. This is up from 56,100 in January and is the highest level since the month of the 'mini Budget' in 2022 which caused mortgage rates to soar.

Net approvals for remortgaging with a different lender also increased, from 30,900 to 37,700.

The 'effective' interest rate -- the actual interest paid -- on newly drawn mortgages fell from 5.2% in January to 4.9% in February.

Mortgage affordability concerns easing

The latest Property Tracker report from the Building Societies Association (BSA) showed a significant reduction in the number of homeowners concerned about paying their mortgage, along with a decrease in those that see mortgage affordability as a barrier to buying a home.

When homeowners were asked about paying their mortgage over the next six months, 90% said they were confident they will keep up with payments, an increase from 85% in December 2023.

"The overall reduction in mortgage rates following the peak in 2023 has been welcomed by homebuyers, and has seen an improvement in confidence in the housing market," said Paul Broadhead, head of Mortgage and Housing Policy at the BSA.

"While consumer prices remain high, wage growth has been strong meaning many households are now in a stronger position than six months ago. There is also an expectation that if inflation continues to fall, the Bank Rate may be cut this year, further easing pressures on borrowers and increasing mortgage affordability."