Rising mortgage rates reshape the balance between residential and commercial property lending, with significant consequences.
- Recent years have seen commercial property lending gain a larger market share compared to residential loans.
- Analysis of Bank of England data highlights a shift in transaction dynamics from 2020-21 to 2023-24.
- Commercial investors seem better equipped to handle increased costs amid tighter mortgage rules and high prices.
- Early signs suggest a potential rebound in transaction levels due to falling interest rates.
In recent years, the property lending landscape has witnessed a notable tilt towards commercial rather than residential transactions, primarily due to rising mortgage rates. Commercial property lending has progressively secured a larger slice of the market. The comparison of Bank of England data from various financial years shows this trend clearly, with commercial transactions increasing their share from 8.0% in 2020-21 to 10.6% in 2023-24.
During the height of residential property sales in 2006-07, transactions accounted for a staggering 92.6% of the market. This peak in residential transactions was largely fuelled by the availability of mortgage finance. However, the landscape has changed drastically. Over the past decade, residential lending has struggled with constraints due to tighter mortgage regulations and escalating house prices, even hitting another peak in 2020-21, albeit under different circumstances when the Bank of England base rate was at a historic low.
Commercial investors are generally perceived as more resilient in navigating the higher financial barriers posed by expensive mortgage financing. They’ve been less impacted by the economic pressures that have weighed heavily on residential buyers. Consequently, the annual growth in commercial lending has outstripped residential, seeing a rise of 2.1% compared to 1.4% for residential transactions.
The peak in residential lending volume occurred in 2021-22, driven by a temporary stamp duty holiday, which led to 1.37 million transactions. However, this was followed by a significant decline. Residential transactions fell by 11.2% to 1.22 million in 2022-23, and then by a further 17.8% to just over one million in 2023-24. On the contrary, commercial transactions showed more stability in their decline. The corresponding drop was by 1.1% and 4.1% over the same periods, evidencing a steadier market.
As interest rates show signs of decreasing, expectations build for a recovery in transaction numbers. June 2024 saw mortgage approvals up by 26.5% compared to the previous year. The Bank of England’s recent steps to cut interest rates, including a 0.25% reduction in August, are anticipated to make mortgage finance more accessible, thereby potentially increasing market activities. Jason Ferrando, CEO of easyMoney, commented on this positive outlook, indicating that the market could soon see an uptick in both consumer and business engagement as more affordable mortgage options emerge.
The evolving property lending landscape shows a strong commercial presence, expected to adapt further with changing interest rates.
