U.K. Mortgage Approvals Rose Unexpectedly in April, BOE Says

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U.K. mortgage approvals rose unexpectedly in April after the Treasury extended a tax holiday on home purchases, fueling a surge in property prices.

The Bank of England said Wednesday 86,921 new loans were approved in April, up from a revised 83,400 the month before. Economists had expected a slight drop to 81,000. The value of those loans fell to 3.3 billion pounds ($4.7 billion) from a record 11.5 billion pounds.

The figures add to signs of strength in the housing market, which Nationwide Building Society said recorded its first dose of double-digit price growth 2014. Jon Cunliffe and Dave Ramsden, who both serve as deputy governors for the central bank, said policy makers were watching the house prices carefully as they weigh whether to pare back stimulus for the economy.

“What we’re seeing in the housing market at the moment is being driven mainly by the tax holiday,” Cunliffe said on BBC News on Tuesday. “We’ve seen very fast rises in house prices and transactions before tax holidays in the past. There are some signs that people are making different housing choices that may affect the future.”

Ramsden told the Guardian newspaper on Tuesday that “there’s a risk that demand gets ahead of supply and that will lead to a more generalized pick-up in inflationary pressure,” adding, “that’s something we are absolutely going to guard against.”

The BOE said the drop in the value of lending is likely due to the stamp duty tax exemption that originally was expected to expire in March and since has been extended to the end of June.

While the BOE’s main gauge of inflation has remained below the 2% target for 1 1/2 years, policy makers expect it to peak around 2.5% by the end of this year, fueled by pent-up savings accumulated while the pandemic closed vast portions of the economy. Retail sales have surged above pre-pandemic levels in recent weeks as Prime Minister Boris Johnson relaxed restrictions to control Covid-19.

The BOE’s figures on Wednesday showed consumers continued to pay off significant amounts of debt since the start of the crisis. Net lending for consumers fell 400 million pounds in April while households deposited a further 10.7 billion pounds in banks and building societies in April.

House prices have surged since the end of the nation’s first lockdown a year ago, defying a wider economic slump. It’s being driven both by tax incentives and a desire among buyers for extra space. While those figures don’t feed through to Britain’s main inflation indicators, the Bank of England is watching the market as it weighs when to pare back economic stimulus.

“It is shifting housing preferences which is continuing to drive activity,
with people reassessing their needs in the wake of the pandemic,” said Robert Gardner, chief economist for Nationwide. “Given that only around 5% of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.”

The Office of National Statistics said earlier this month that prices climbed at the fastest pace since the financial crisis in March, although some are predicting the market may run out of steam when a tax cut starts to expire next month.

“Further ahead, the outlook for the market is far more uncertain,” said Gardner, the Nationwide economist. “If unemployment rises sharply towards the end of the year as most analysts expect, there is scope for activity to slow, perhaps sharply, though even this could potentially be offset by ongoing shifts in housing preferences.”

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