Mortgage approvals hit nine-month low amid 'weakened consumer purchasing power'

Mortgage approvals tumbled to a nine-month low in June, as fewer inflation-squeezed consumers took the plunge into home ownership.

The latest Money and Credit report released by the Bank of England showed that UK lenders approved only 64,684 mortgages for new home purchases last month, down from 65,109 in May.

It was the lowest level recorded since September, when approvals totalled 63,532.

Experts say it is the latest sign that rising inflation is impacting the UK economy.

Howard Archer, chief economic adviser to the EY ITEM Club, said: "Housing market activity is being pressurised by weakened consumer purchasing power and increased consumer wariness over engaging in major transactions."

Purchasing power has been knocked by high inflation - driven by the Brexit-hit pound - as rising consumer prices continue to outstrip earnings growth.

"Potential house buyers may also be concerned by recent speculation that the Bank of England could be near to hiking interest rates," Mr Archer added.

"While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since mid-2007 could have a significant effect on housing market psychology by focusing minds on the fact that sooner or later they will have to deal with higher mortgage rates."

The drop in demand has weighed on house price growth, which Mr Archer said is likely to be capped at around 2% for 2017 and remain relatively flat over 2018.

While house price growth may be easing, Legal & General Mortgage Club director Jeremy Duncombe said high prices are still a barrier for first-time buyers.

He said: "What the figures do not show is that buyers are having to borrow larger sums of money as house prices continue to rise at a much higher rate than wage inflation. Put simply, house prices are making it extremely challenging for first-time buyers to become home owners.

"To add to this, people already on the ladder are finding themselves stuck in their current homes due to the lack of supply, and the costs associated with moving."

The Money and Credit report also showed that non-mortgage lending to consumers dropped from £1.8 billion in May to £1.5 billion in June, while the annual consumer credit growth rate dropped from 10.4% to 10%.

Credit card lending rose slightly from £400 million to £500 million, but was countered by a drop in other loans and advances, which fell from £1.3 billion to £900 million.

Mr Archer said the overall drop in consumer credit should come as a relief for the Bank of England.

"The Bank sees the recent uptrend of consumer borrowing as a significant risk to the economy and has warned that banks risk becoming complacent in their lending behaviour," he said.

"The latest credit conditions survey did at least indicate that banks are becoming more cautious in their behaviour by making less unsecured credit available to consumers and tightening lending standards."