(Jan 31): UK mortgage approvals fell to their lowest level in 2½ years as higher borrowing costs took their toll on the property market.

Banks and building societies authorized 35,612 home loans in December, the fewest since May 2020 when the housing market was shut due to the coronavirus pandemic, Bank of England figures published Tuesday show.

Excluding the turbulence at the start of the pandemic, it was the weakest month for house purchase approvals since January 2009, in the depth of the financial crisis, and was around 45% below pre-pandemic levels.

Weakening demand is feeding through to house prices, which are on course to fall this year after booming during the pandemic. Nationwide Building Society is predicting a 5% drop, while Halifax thinks 8%.

An unprecedented series of interest-rate hikes from the Bank of England has bumped up the cost of mortgages. The effective rate on new loans rose 32 basis points to 3.67% last month. A year earlier, this was just 1.58%.

This is the both the highest rate and the largest month-on-month jump since the end of 2015, when comparable BOE data began.

December marked the fourth consecutive month in which mortgage approvals — an indicator of future borrowing — fell, and was well below the 45,000 expected by economists. Net borrowing of mortgage debt dropped from £4.3 billion to £3.2 billion.

Unsecured credit such as personal loans and credit-card debt rose just £500 million (US$615 million) after hitting a five-month high of £1.5 billion in November. The sharp slowdown tallies with a fall in retail sales during the month and suggests consumer spending is weakening.

Consumers paid off almost half a billion pounds of credit-card debt over the Christmas period — excluding the pandemic years, this was the first time they reduced their debt on plastic over a December since 2011.

This follows several months of rapid rises in credit-card borrowing, in part driven by struggling households taking on debt to help them through the cost-of-living crisis.

Consumers still borrowed £1 billion in other forms of debt, such as car dealership finance and personal loans, the highest since October 2019.