Housing market freezes up as lending continues to fall

House covered in snow

The “collapse” of the housing market as a result of restricted lending has prompted calls for the Bank of England to cut interest rates later this week.

Figures from the UK’s central bank show a fall in new mortgages during April, with just £23.8 billion secured on property. This is below the increase in March and the previous six-month average. And despite an increase in the number of remortgage loans during April, new purchase mortgages fell during the month.

The decline in lending has resulted in a near frozen housing market. There are now significantly fewer buying and selling transactions compared to previous years as many first-time buyers are unable to borrow, buy-to-let investors are nervous about making new investments, and current home owners prefer to stay put than move during a downturn in the market.

Although the Bank of England has attempted to help banks lend money again, through its Special Liquidity Scheme, its reluctance to cut interest rates has put upward pressure on the cost of funding – resulting in lenders putting up their rates and restricting borrowing further.

The Monetary Policy Committee (MPC) – the Bank of England group which sets interest rates – will meet on Thursday 5 June to vote on whether to maintain rates at 5% or reduce them by 0.25% or even 0.50%.

To cut or not to cut?

Last month the majority of members opted for a freeze, arguing that keeping soaring inflation under control was its main priority and that a cooling economy was essential to achieve this over the next couple of years.

However, those working in the housing industry say an interest rate cut is desperately needed in order to support the market traditionally known as the backbone of the economy.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, says: "The 58,000 mortgages approved in April is roughly half the total sanctioned in the same month a year ago.

“This highlights very clearly the real problem facing not just the property market but also the wider economy. A collapse in transactions of this magnitude has major implications both for consumer spending and a wide range of ancillary industries.”

However, Rubinsohn concedes that any response from the Bank of England is unlikely this week: "Although a supportive response from the Bank of England is improbable in the near term, the persistence of such a trend could force the hand of the authorities as autumn approaches."

Mortgage lending is expected to slow further in the months ahead.

Gary Styles, a director at housing data provider Hometrack, forecasts growth in lending to slow to around 5.7% at the end of this year – down from 10% in 2007.

"The contrasting fortunes of the remortgage and house purchase market reflect several factors including the reduced risk appetite of lenders to lend to new borrowers, low levels of house move activity and the need for borrowers to refinance existing fixed rate mortgage deals,” he adds. "Reduced credit supply and repricing in the credit markets have changed the sentiment and outlook for the mortgage and housing market.”

Despite interest rates being lower than they were 12 months ago, the cost of funding for lending is still high as negative sentiment pushes rates on inter-bank loans through the roof.

Nicholas Leeming, a director of propertyfinder.com, says: "The housing market is being choked by the lack of mortgage availability. The MPC has tried to breathe life into the market with interest rate cuts but they have been unsuccessful in thawing the capital markets and lenders continue to put up mortgage rates – freezing out borrowers."

He adds: "It’s essential for the health of the economy that the Bank of England takes immediate action."


It isn’t just rising mortgage costs hurting British consumers. Soaring food and utility prices - plus an increase in other sorts of borrowing, such as credit cards - are also playing a part in making people feel worse off financially than they felt a year ago.

Homeowners’ financial situations could be making many relunctant to move. Research from price comparison website gocompare.com found that around a quarter of homeowners feel trapped in their current homes because of their finances.

On average, 79% of those homeowners questioned said they'd be staying put in their current property for the next three years.

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