Bank of England could be more likely to leave interest rates on hold amid property upturn

This article is more than 7 months old

This article is more than 7 months old

The number of mortgages approved by Britain’s high street banks jumped to the highest level for almost five years in December, in the latest sign of a revival in the housing market.

Mortgage approvals for house purchases increased to 46,815 in December compared with 44,058 a month earlier, according to UK Finance – hitting the highest level since April 2015.

The trade body that represents major high street banks across the country said the value of mortgage lending increased the most since March 2016, rising by a net £3.8bn.

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The figures come as the Bank of England weighs up cutting interest rates on Thursday after the UK economy flatlined at the end of last year amid intense political uncertainty over Brexit and the snap general election.

City economists believe a decision between holding borrowing costs steady and cutting the key rate from the current level of 0.75% rests on a knife edge before Mark Carney’s final meeting in charge of the monetary policy committee on Thursday. The Bank’s governor will be replaced by Andrew Bailey, the head of the Financial Conduct Authority, in March.

Retail sales unexpectedly plunged in December while inflation dropped, in a reflection of weakness in the economy at the end of the year. However, a rise in mortgage borrowing, a jump in employment levels and increasing business confidence since Boris Johnson’s election victory could encourage the Bank to leave rates on hold.

According to the property website Rightmove, house prices rose on the month in December at the fastest rate on record for the time of the year, as buyers and sellers felt more confident about the outlook for the housing market.

Howard Archer, the chief economic adviser to the EY Item Club, said it was likely that mortgage approvals were lifted by increased confidence since the election.

“Prior to November, mortgage approvals for house purchases had fallen back for three successive months to be at a seven-month low in October, indicating that activity was being pressurised by heightened uncertainties over the domestic political situation and Brexit,” he said.

However, Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said any post-election bounce would be shown in the January data, as it took about two weeks for buyers to receive a mortgage offer. He said the jump in December probably reflected falling borrowing costs for households in the second half of 2019.

The rise in mortgage approvals comes amid intense competition among high street banks to sell home loans.

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According to the consultancy Capital Economics, the average quoted rate on a five-year fixed, 75% loan-to-value mortgage fell from 2.05% in January 2019 to 1.69% in December – the lowest on record.

Gabriella Dickens, an assistant economist at the consultancy, said: “So instead of reflecting a broader expansion in credit, much of the annual rise recorded by UK Finance reflects these lenders competing for market share.”

Despite the upturn in mortgage approvals, the outlook for the housing market will also depend on the next phase of the Brexit talks with Brussels, as the government attempts to strike a trade deal with the EU before the end of 2020.

Andrew Montlake, the managing director of the mortgage broker Coreco, said: “It goes without saying that a huge amount is riding on the outcome of the trade negotiations and so there is still the potential for significant volatility.”