Housing slowdown not over yet

House of cards falling

Mortgage lending hit record lows in August official figures show today, suggesting the market slowdown still has some way to go.

The Bank of England reports that the number of mortgages approved by lenders fell from 33,000 in July to 32,000 in August - 75% below their peak. According to Capital Economics, this level of lending suggests house prices will fall by 25% a year as a lack of credit freezes the market.

However, it is also likely that the low level of activity in August partly reflects uncertainty about stamp duty, with potential buyers waiting to see what action the government would take. In September, Gordon Brown announced that the nil-band for stamp duty would be increased from £125,000 to £175,000 for one year only.

Paul Dales, economist at Capital Economics, says: “It is possible that the suspension of stamp duty for properties costing less than £175,000 at the start of September will support approvals in the coming months. But we are not convinced. Why would households borrow to buy an asset that might soon be falling in price by around 25% per year?”

Andrew Gall, business economist at the Building Society Association, agrees that a lack of consumer confidence about the future in house prices is a big factor in the slowdown of mortgage lending.

"[Our survey shows] more than half of people consider the prospect of future falls in house prices a barrier to house purchase, it is hardly surprising that demand for mortgages is so low," he explains.

The latest house price index from Hometrack, a property valuation firm, shows that prices have fallen by 1% during September, the 12th consecutive decline in prices. This means the average property is worth 6.2% less that it was 12 months ago.

Richard Donnell, director of research at Hometrack, says: "The number of homes set to change hands in 2008 is likely to fall to a level not seen since the 1960s. Weak demand continues to put a downward pressure on house prices and looking ahead it is very hard to identify the mechanisms by which the current cycle of weak confidence, declining sales volumes and falling prices can be reversed in the near future."

Market hit

The credit crunch in America and resultant banking crisis in the UK has hit all British banks, but few harder than Bradford & Bingley with its high exposure to 'risky' buy-to-let mortgages and reliance on the money markets for funding.

As a result its profits took nearly a 50% hit in the first six months of this year. And unlike rivals such as Alliance & Leicester, Bradford & Bingley has been unable to find a larger institution to offer it a lifeline.

The future of the mortgage market continues to look grim, with little confidence about the future. A report by a mortgage trade body, the Association of Mortgage Intermediaries (AMI), predicts that mortgage lending for the whole of 2008 will be around £55 billion – half the 2007 level – and is not likely to increase in 2009.

Chris Cummings, director general of  AMI, says: “The impact of the credit crunch is likely to be felt much longer and deeper than was expected 12 months ago."

Mortgage rates look set to soar again after banking giant HSBC announced it is hiking its fixed-rate mortgages from 5.97% to 6.27%.

The move by the bank, which also announced it is cutting 1,100 jobs worldwide in response to the banking crisis, follows Yorkshire Building Society upping its fixed-rate mortgage costs, as well as Woolwich and First Direct also increasing rates.

In recent months the cost of mortgages has fallen, in response to cheaper funding. Banks largely rely on money from other institutions to fund their mortgage operations, which is normally priced using either swap or Libor exchange rates.

However, the banking crisis – which resulted in HBOS being bought-out by Lloyds TSB and the US government planning a $700 million rescue package – has caused both swap rates and Libor to rise again.
A spokesman at HSBC says: "With swaps spiking over the last week by 40 basis points [0.4%] we have tried to maintain choice in the market, but also not reducing LTVs [the ration of the loan and the value of the property].”

According to Katie Tucker, technical manager at mortgage broker Mortgageforce, the swap rates (which are used to price fixed-rate mortgages) have jumped from 5.18% to 5.58% in just one week, while Libor (which is used for variable rate mortgages) has rocketed from 5.71% to 6.06%.

Tucker says: “Low rate mortgage choices were really looking bright before the drama last week, and the good news is many lenders still have money left on the rates they priced before funding shot up.

“However, this sharp hike will force lenders to re-price their new deals higher when these ones run out, to make up for the extra cost.”