Banks are expected to tighten mortgage lending for UK property as they battle higher interest rates, a riskier economic outlook, and volatility in the markets.
The forecast for mortgage lending in Britain is set to grow 4% this year, but slow to just 0.7% in 2023 thanks to rising interest rates and a fall in real income.
According to EY’s Item Club Outlook for financial Services, this will be the lowest level since 2011 in the aftermath of the financial crisis.
Demand for consumer credit is expected to rise 7.2% this year, as cost of living and inflationary pressures deepen. But this high rate is not expected to be sustained, and as inflation falls back and the squeeze on households’ real incomes eases, the growth rate is predicted to slow to 5.1% in 2023.
This represents a reversal of the pandemic period when demand fell more than 10%.
Meanwhile, bank-to-business lending is also forecast to grow 2.2% this year but fall 3.5% in 2023 as appetite and ability for UK businesses to invest is affected by the deteriorating economic outlook and rising interest rates.
This would be the first decline in six years, but less severe than the average annual fall of 7.2% between 2009 and 2012 during and after the financial crisis.
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In contrast to 2021, when many UK businesses focused on paying back pandemic debt, this year has seen a return to growth in borrowing, particularly by large corporates, the data showed.
But average growth of 2.4% in the eight months to August was low by pre-pandemic standards, where annual growth averaged 5.2% over 2018 and 2019.
It comes as overall housing market activity has remained fairly buoyant this year, in part as buyers looked to lock-in low rate deals, with mortgage lending forecast to to £63bn in net terms.
Real incomes are also set for the biggest annual decline since the 1970s.
“Geopolitics and the worsening economic environment are having a significant impact on households and businesses. While interest rates are still fairly low by historic standards, they are the highest they’ve been in a decade and are set to rise further,” Anna Anthony, UK financial services managing partner at EY, said.
“This will put further pressure on already-strained finances and will have a knock-on effect on demand for most forms of bank lending next year, as potential homeowners postpone purchases and businesses pause investment.
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He added: “Affordability is stretched and mortgage and business lending are likely to slow to a rate similar to that seen post-financial crisis. The key difference now is that tighter regulation and higher solvency levels mean banks are well capitalised and far more able to support customers through this challenging period.