LONDON: British banks and building societies expect to lend 23% less to home-buyers next year, taking mortgage volumes back to their level before the COVID pandemic after a two-year boom that lifted house prices by more than a quarter.

Trade body UK Finance forecast on Monday that gross mortgage lending for house purchase would fall to 131 billion pounds ($161 billion) in 2023 from 171 billion pounds this year and a peak of 189 billion pounds in 2021, when pandemic-related tax incentives were in force.

Lending to buy-to-let landlords was forecast to fall by 27%, and overall residential property sales were likely to drop to 1.01 million next year from 1.27 million in 2022, it added.

“Amid challenging times for the UK economy, we expect cost of living pressures and rising interest rates to reduce demand for house purchases,” it said.

Recent weeks have brought growing signs that British house prices are starting to drop in the face of an incipient recession and higher interest rates.

Property website Rightmove said on Friday that average asking prices for newly listed property had fallen by 2.1% this month, the largest December fall in four years.

“It’s an understandable short-term reaction to the economic turmoil and unexpectedly rapid mortgage rate rises and reduction in availability of mortgage products that we saw in late September and October,” Rightmove director Tim Bannister said.

The Bank of England is expected to raise its main interest rate to 3.5% from 3% on Thursday, according to economists polled by Reuters. UK Finance noted that many home-owners who bought properties with two-year fixed-rate mortgages last year would soon have to pay much higher interest rates.

Last week mortgage lender Halifax reported a 2.3% decline in house prices for November, the largest monthly drop in its data since 2008 and one which reduced the annual house price rise to 4.7% from 8.2%.