Mortgage lending plummets

1 December 2008

The value of new mortgages being approved plunged by almost 70% during October, the second lowest figure on record, according to the Bank of England.

The central bank’s latest figures show that just £495 million was lent for house purchases in October, well down from the £1.49 billion lent in September. Meanwhile, the number of new mortgage approvals fell to 32,000 in October, the same as August, which was the lowest since records began in 1993.

On an annual basis, the number of new mortgages approved has fallen by almost 64% over the past year, falling from 88,000 in October.

Data from the Building Societies Association (BSA) also confirmed the view of depressed housing market. Net mortgage lending by building societies was £413 million in October, some 45% lower than last year.

Adrian Coles, director general of the BSA, says: "With the depressed state of the housing market, it is no surprise that mortgage lending by societies remains low, albeit slightly improved in September. With confidence in the market so restrained, homeowners are choosing to stay put rather than move, while first-time buyers continue to wait for further falls in prices."

Howard Archer, chief UK and European economist at Global Insight, believes that house prices have further to fall.

“Housing market activity is exceptionally low compared to long-term norms," he says. "Ongoing very tight credit conditions, still relatively stretched housing affordability on a number of measures, recession, faster rising unemployment and widespread expectations that house prices are likely to fall a lot further form a powerful set of negative factors weighing down on the housing market.”

As a consequence, Archer believes that house prices will fall by a further 15% in 2009 and by 5% in the first half of 2010 before house prices eventually stabilise.

On a brighter note Legal & General has said that confidence is returning amongst mortgage advisers, with 27% expecting business to get better over the next three months – up from 21% in the previous quarter.

Stephen Smith, director of house at Legal & General, explains: “The dramatic cuts in interest rates have played a part in the newfound confidence. The vast majority of advisers are predicting a further base rate cut next month, with half of them foreseeing a reduction from 3% to 2.5%.

"Hopefully this will buoy confidence further, although it remains to be seen what affect a tough winter and the inevitable festive slowdown will have on our advisers' confidence in our next report."

If confidence is to return to the mortgage market, the Royal Institution of Chartered Surveyors (RICS) has urged the Bank of England’s Monetary Policy Committee (MPC) to cut interest rates further when it meets later this week.

“The lack of transactions in the property market is now taking its toll on the high street with spending on a wide range of consumer durable goods plummeting,” says Simon Rubinsohn, chief economist at RICS. “This has been reflected not just in the collapse of retailers but poor trading news from others. The Bank of England will need to cut rates further this week for any chance of getting the mortgage market moving."

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