Mortgage lending in February fell to its lowest level since 2016, excluding the pandemic, the Bank of England has said.
But the number of mortgages approved by lenders rose slightly, suggesting the slowdown may be stabilising.
It comes as higher borrowing costs make buying property less affordable.
Homeowners borrowed £700m in February, down from £2bn in January, the Bank said. That is the lowest level since April 2016 apart from the Covid crisis.
However, mortgage approvals rose to their highest level for three months, climbing to 43,500 in February from 39,600 in January.
Karen Noye, a mortgage expert at Quilter, suggested people were still in “wait-and-see” mode as borrowing costs remained high.
But she said the rebound in approvals meant “green shoots might be appearing” in the housing market.
“It’s clear that home-buyers are cautiously returning back to the market in early 2023 after the huge shocks at the back end of last year made many put their house hunts on ice. How this all feeds through to house prices is yet to be seen.”
Mortgage rates began to rise last year as interest rates climbed, but they spiked in September after Liz Truss’s mini-budget caused panic on financial markets.
Rates have stabilised but remain much higher than they were a few years ago, squeezing people’s purchasing power.
It has fed through to house prices, which in the year to February saw their biggest annual fall in more than ten years, according to Nationwide.
Nevertheless, the Bank of England forecast that fewer households were likely to struggle to afford mortgage payments this year than previously forecast due to falling energy prices.
In December it warned 670,000 households could face difficulties.
Alice Haine, personal finance analyst at Bestinvest, said buyers were going for smaller homes to reflect their budgets as the “cost-of-living crunch is still very real”.
“The cost pressures mean buyers simply cannot afford the same properties they could a year ago and must consider smaller or cheaper homes if they want to push ahead with a purchase at this time,” she said.
Advice to pension funds
The mini-budget last autumn sparked market turmoil, with the Bank of England having to step in to stabilise pension funds.
It bought up government debt to stop a fire-sale by some pension funds of assets which could have led to their collapse.
On Wednesday, the Bank laid out a range of ways pension funds could protect themselves in future, to avoid another crisis.
It urged the funds at the heart of last year’s crisis – known as Liability Driven Investment funds – to have enough money to withstand a surge in government bond yields, as well as other measures.
It came as the Bank of England’s committee watching for financial risks said the UK economy had remained resilient, and banking system robust, despite global stresses.