Rising mortgage rates are affecting residential property lending more than commercial, with the latter taking a greater share of the property market in the past few years.
Peer-to-peer real estate investment platform easyMoney has analysed Bank of England mortgage approval data to measure the balance between residential and commercial transactions since the 2005-06 financial year.
The research shows that in 2023-24 non-residential sales made up 10.6% of all market transactions, with this market share increasing steadily from 8.0% in 2020-21. So the lender says that giiven that expensive mortgage finance has been a stumbling block over the period, clearly commercial property investors are more able to cope with the higher cost of finance.
The proportion of residential transactions peaked in 2006-07, at 92.6%, when there was a plentiful supply of mortgage finance. Since then tighter mortgage rules and rising house prices have made it harder for residential buyers. There was a second peak in residential lending compared to commercial in 2020-21, at 92.0%, the year the Bank of England base rate dropped to a record 0.1%.
However in the past 10 years the long-term trend has been a surge in commercial lending compared to residential, as residential transactions have climbed by an average of 1.4% per year, compared to 2.1% for non-residential.
Focusing on the volume of lending, the residential market’s recent peak was in 2021-22, when there were 1.37m transactions. This was at a time when the market was boosted by the stamp duty holiday, while the housing market was surging after a pause for breath during the pandemic.
Since then however rising interest rates have taken their toll, as residential transactions dropped by 11.2% to 1.22m in 2022-23, and then down by a further 17.8% to just over 1.0m in 2023-24.
The commercial market has been more stable, as non-residential transactions only saw minor falls from 124,860 in 2021-22, to 123,430 in 2022-23 (-1.1%) and then by -4.1.% to 118,360 in 2023-24.
easyMoney says that while property lending has dropped off, especially in the residential space, transaction levels seem destined to bounce back in the 2024-25 financial year; this is already playing out in the early data, as in June 2024 mortgage approvals were 26.5% higher than the same month last year.
It’s helped that the Bank of England has finally started cutting interest rates again, with a reduction of 0.25% on August 1, while at least one more cut is expected by the end of the calendar year, which should slowly make mortgage rates more affordable.
An easyMoney spokesperson says: “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. 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.”