After a long, difficult winter and not much easier summer, some of the worst fears about the UK economy are beginning to ease. According to the Confederation of British Industry (CBI), Britain’s economy now looks like it’s set to dodge a full-blown recession by the skin of its teeth.

The economy is now on course to expand 0.4% in 2023 and 1.8% next year, dispelling previous fears of a large contraction. All in all, it’s not bad news. However, many of the UK’s deep-rooted economic issues, namely weak business investment and low trade intensity persist. Couple the blustery economic outlook with high interest rates and low wage growth and you’ve got less than ideal conditions for a thriving housing market. Let’s dig into what that means for the rest of this year. 

Mortgage Approvals Dip

The number of mortgage approvals fell by nearly 10% in July, sinking to their lowest figure this year, according to new data from the Bank of England (BoE). To some this came as a surprise, given June had seen an uptick in approvals. But, unfortunately, this outcome is all too predictable.

The BoE has raised interest rates 14 times in a row as it tries to slow the fastest pace of price rises among the world’s big economies. As a consequence, these hikes have slowly diminished appetites for borrowing. It’s not hard to sympathise with prospective homebuyers, many will feel that borrowing at a time when rates continue to rise month on month is simply too much of a risk. And, similar to what we saw in the early days of the pandemic, plenty of people will opt to bide their time instead.

In turn, this caution from homebuyers is likely to put a short-term dent in mortgage approval figures as fewer people look to borrow.

Transaction Levels Set to Fall

Closely tied to mortgage approvals, it also looks as though transaction levels are set to take a hit. Real estate giant, Zoopla has forecast that the number of UK housing transactions completed in 2023 is due to be over 20% lower than 2022. To give that a little perspective, it would represent the lowest figure since 2012 when the market was still recovering from the 2008 financial crisis.

Zoopla says the market will hit around one million sales completions by the end of this year. This is equivalent to the average UK household moving once every 23 years. That might seem like a slightly strange metric. However, it’s illustrative of a general slowdown in transactions as the figure in 2021 was every 17 years.

We’re seeing this reflected in transaction figures too. The latest HM Revenue & Customs Data reveals that its ‘provisional non-seasonally adjusted estimate’ of the number of UK residential transactions in July 2023 is 86,190. That’s lower than July 2022 by a huge 22% and almost a tenth (9%) lower than the previous month.

So what’s driving this fall in the number of people buying homes? If we delve a little deeper into the data it becomes clear. Zoopla’s findings reveal that this drop is being driven by declining mortgage sales which have fallen some 28% since H1 of 2022. By comparison, cash sales have only fallen 1% during the same period. 

This is backed up by UK Finance’s latest version of its Household Finance Review. The report details the fall in first-time buyer purchases (28%) and home mover purchases (30%) in Q2 2023 compared to the equivalent period last year.

It appears obvious then, that the fall is being driven by adverse economic and borrowing conditions. Anybody who has to rely on a mortgage to purchase or move home is simply less likely to do so than a year ago – echoing the points we made earlier regarding mortgage approvals.

What Does the Future Hold? 

We’ve established that the property market is in the middle of a fallow period, but what does the future look like?

Well, in the short term at least, things are likely to remain slow. As long as borrowing conditions remain onerous for homebuyers, we’re going to see less than stellar transaction levels. Many people will simply decide to wait and see rather than rush into making a purchase.

However, it’s not all bad news. Firstly, the property market was always due to cool down a little after running very hot for large parts of the pandemic years. It’s worth viewing what’s happening at the moment as something like a natural corrective.

What’s more, there are tentative signs that Britain’s inflation worries are beginning to ease. As we mentioned at the top of the piece, the UK is predicted to avoid a recession and the BoE is beginning to signal that interest rates have reached their peak. Of course, this doesn’t mean the market will recover, it’ll take time for homebuyers to regain confidence, but we can be hopeful that we should begin to see a recovery in 2024.

Finally, it’s worth remembering this all could’ve been far worse. Another recession, even one less severe than 2008, would’ve been disastrous for the property market and avoiding that is probably the best good news story we’ll hear this year.