The UK housing market is set for a significant boost as mortgage lending growth is projected to more than double in 2025. According to the EY Item Club’s latest analysis, while lending is expected to increase by a modest 1.5% this year, it is anticipated to surge by 3.2% in 2025 and 3% in 2026. This optimistic forecast hinges on the predicted decline in inflation and the anticipated reduction in interest rates.

Current Trends and Economic Outlook

Mortgage lending in the UK is forecast to grow at a slow pace of 1.5% (net) in 2024, largely due to stretched affordability and high borrowing costs which continue to dampen home-buying demand. The after-effects of the economic recession in the latter half of 2023 are still impacting GDP growth, but an economic recovery is expected to gain momentum this year as inflation falls and household spending power increases.

The overall economic landscape, however, is not without its challenges. Rising geopolitical tensions in Europe and the Middle East present significant risks to confidence levels, which could impact the projected growth.

EY ITEM Club Forecasts

The EY ITEM Club predicts a modest growth in total bank loans to households, estimating a 1.7% (net) increase this year, a slight improvement from the stagnant growth in 2023. The outlook brightens considerably for the years ahead, with expected growth rates of 3.2% (net) in both 2025 and 2026, driven by the anticipated economic recovery.

Anna Anthony, UK Financial Services Managing Partner at EY, commented on the situation, stating, “While we are hopefully beginning to see economic recovery in the UK, both households and businesses continue to face high borrowing costs. This has a direct impact on bank lending and the housing market has been particularly affected.”

Signs of Recovery in the Housing Market

Despite the challenges, the housing market has shown signs of recovery. Mortgage approvals have been rising for five consecutive months as of February. However, the high cost of borrowing and stretched affordability are expected to constrain demand throughout 2024.

If inflation continues to decrease and interest rates are cut as anticipated, consumer sentiment is expected to improve, driving a significant rise in housing demand in 2025. The EY ITEM Club’s forecast of 3.2% (net) growth in mortgage lending for 2025 reflects this optimistic outlook, with a slight moderation to 3% (net) in 2026.

Impact on Unsecured Credit and Write-Off Rates

The forecast for unsecured credit lending also shows a tapering growth trend. After a 6.1% (net) growth in 2023 due to inflationary pressures, the EY ITEM Club predicts a slowdown to 5.4% in 2024, 4.5% in 2025, and 4.2% in 2026 as inflation continues to fall and cost-of-living pressures ease.

However, higher mortgage costs are expected to lead to an increase in write-off rates on UK mortgages, from 0.004% in 2023 to 0.017% in 2025. Despite this rise, the write-off rates remain significantly below the average of the 2010s, thanks to low unemployment levels. A decline to 0.01% is anticipated in 2026 as the pressure from high interest rates eases.

Industry Insights

Dan Cooper, UK Head of Banking and Capital Markets at EY, remarked on the resilience of UK banks, noting, “UK banks continue to operate in challenging market conditions and are facing another year of very low lending growth. Inflationary pressures are beginning to ease, but borrowing costs remain high, impacting customer appetite for loans. Despite these challenges, banks have consistently supported their customers and must continue to do so while also investing in long-term strategic priorities such as digital transformation and the adoption of Generative AI.”

The economic recovery, alongside strategic adaptations by banks, could position the UK for a significant rebound in mortgage lending, promising a brighter outlook for the housing market and the broader economy in the coming years. As policymakers and financial institutions navigate these dynamics, the anticipated growth in mortgage lending in 2025 represents a beacon of hope for the sector and the UK economy at large.

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Last Update: May 13, 2024