Rising rates weigh on residential lending
Commercial property transactions have gained ground in the UK market as rising mortgage rates put pressure on residential lending, according to data analysis by real estate investment platform easyMoney.
The analysis, based on Bank of England mortgage approval data, reveals that non-residential property transactions accounted for 10.6% of the total market in the 2023-24 financial year, up from 8% in 2020-21. This shift highlights commercial investors’ ability to withstand higher borrowing costs, which have hindered many residential buyers.
Residential transactions dominated the market in 2006-07, peaking at 92.6% of all property transactions. At the time, mortgage finance was widely accessible. However, rising house prices and stricter lending criteria have since limited residential market growth. Another residential lending peak occurred in 2020-21, when transactions reached 92% of the market as the Bank of England’s base rate hit a historic low of 0.1% in response to the pandemic.
Over the past decade, however, commercial property has steadily increased its share. Residential transaction volumes have grown by an average of 1.4% annually, while non-residential volumes have risen by 2.1% per year, reflecting a longer-term trend toward commercial lending.
The volume of residential transactions peaked in 2021-22, with 1.37 million deals driven by the stamp duty holiday and post-pandemic demand. Since then, rising interest rates have curbed activity, with residential transactions falling 11.2% to 1.22 million in 2022-23, and another 17.8% to just over 1 million in 2023-24.
In contrast, the commercial property market has experienced relatively modest declines. Non-residential transactions dropped by only 1.1% from 124,860 in 2021-22 to 123,430 in 2022-23, and by a further 4.1% to 118,360 in 2023-24.
Despite recent challenges, property transaction levels are expected to rebound in the current financial year. Bank of England data shows that mortgage approvals in June 2024 were up 26.5% compared to the same month in 2023, signalling renewed activity. The Bank’s recent decision to cut interest rates by 0.25% in August, with more reductions anticipated, could further support affordability and stimulate both residential and commercial property markets.
“It’s been a rocky few years for the housing market, as fewer consumers were able to buy homes due to the rising cost of finance,” said Jason Ferrando (pictured), chief executive of easyMoney. “The commercial property markets have been more robust in the face of these challenges, as those with deeper pockets were able to shoulder the burden of higher costs.
“The good news is we’re set for a busier market in the years ahead, as early Bank of England data suggests that more consumers and businesses are taking advantage of the cheaper mortgage finance available this year.”
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