Mortgage Demand Drop: A Budget-Driven Pause or a Deeper Stumble?

The data shows a clear pause. Mortgage approvals for house purchases fell to 64,530 in November, the lowest level in two years. This drop was not a surprise to the Bank of England, which had already flagged a sharp decline in demand in its quarterly credit conditions survey. The survey's timing is crucial: its findings were collected between November 10 and December 3, a period of peak uncertainty just before Chancellor Rachel Reeves unveiled her November 26 budget. The central bank explicitly linked the hesitation to speculation about property taxes, particularly the new surcharge on homes over £2 million.

Viewed through a historical lens, this pattern is familiar. When major fiscal policy is in flux, economic behavior often freezes. The November drop fits that script of temporary pause, not a fundamental breakdown. Other signs of household financial health remained stable. Loan default rates were falling, and lenders expected them to drop further. Mortgage costs themselves were easing, with secured lending spreads narrowing-a key sign of improving financial conditions for homeowners.

The bottom line is one of timing, not trend. The budget uncertainty created a clear, temporary shock to demand. The fact that approvals fell even as the broader economy showed unexpected growth in November suggests the pause was policy-driven, not a reflection of underlying economic weakness. For now, the market appears to be waiting for clarity before resuming its path.

The Policy Catalyst: The Mansion tax and Its Timing

The specific policy that froze demand was the Chancellor's announcement of a mansion tax, officially called the High Value Council Tax Surcharge, on homes worth over £2 million. This new levy, set to be collected alongside council tax from April 2028, will cost homeowners £2,500 to £7,500 per year depending on property value. The timing of this announcement on November 26 was the critical catalyst. The Bank of England's credit conditions survey, which captured the peak of the demand drop, collected data between November 10 and December 3. That window of uncertainty-just before the budget was unveiled-created a clear pause as buyers weighed the potential new cost.

This tax was not an isolated measure but part of a broader budget of complex, multi-year fiscal adjustments. The Chancellor also extended the freeze on personal tax thresholds for three years, a move that will gradually push more workers into higher tax brackets. Combined with other targeted changes, like increased property income taxes from April 2027, the overall package introduced a layer of fiscal uncertainty that weighed on household decision-making. As one analysis noted, the Chancellor opted for "a relatively large number of smaller, in many ways more complex, measures" rather than a few bold, simple levers.

Viewed historically, this approach mirrors past episodes where policy complexity, rather than a single dramatic shock, creates market hesitation. The mansion tax's delayed implementation (2028) and its reliance on potentially contentious desktop valuations add further ambiguity. In that sense, the November drop in mortgage approvals was less a reaction to an immediate cost and more a response to a complex, multi-year policy shift that introduced significant planning risk for high-value property owners. The market paused to assess the full, long-term implications.

Market Resilience and the Path Forward

The broader context reveals a market already struggling for momentum before the budget hit. The Royal Institution of Chartered Surveyors (RICS) reported that buyer enquiries, agreed sales, and new listings all fell in September, marking a third consecutive month of decline. This pre-existing stall, driven by affordability and uncertainty, suggests the November drop in mortgage approvals was not an isolated event but the latest in a series of downward pressures. The market had already entered a wait-and-see phase.

Looking ahead, lenders expect demand to drift lower still in the first quarter of 2026. The Bank of England's survey explicitly noted this expectation, framing the post-budget pause as a continuation of a trend. Yet historical patterns offer a counterpoint. As one estate agent observed, "in similar circumstances previously, we have often found the weaker the uncertainty, the stronger the recovery." This implies the current dip may be a temporary reset, not a structural breakdown. The key watchpoint is whether the post-budget decline is a one-off pause or the start of a longer-term trend. That distinction will become clearer as data for the first quarter of 2026 becomes available.

For now, the setup is one of fragile resilience. While the housing market's forward view remains negative, other financial conditions are improving. Mortgage costs are easing, and default rates are falling. This creates a potential offsetting force. The path forward hinges on policy clarity. If the mansion tax's delayed implementation and complex mechanics are confirmed, they may dampen activity for years. But if the market's pre-budget stall was the real baseline, and the budget merely accelerated a necessary pause, then the recovery could be swift once the fog lifts. The coming months will test which narrative holds.