More trouble ahead for mortgage market

Published 01st Nov 2009

Despite figures showing a jump in lending economists warn that recovery is fragile


The mortgage market is rebounding as lenders boost the number of deals approved for homebuyers, according to new figures. However, economists have warned that the resurgence in activity is unlikely to continue.

The Bank of England (BoE) released data yesterday showing that 56,215 home loans were approved for house purchases last month, a 12 per cent rise from August and double the number approved in November last year, when the housing market almost ground to a halt. It was the highest number of new loan approvals for 18 months.

Net lending in September, the amount of new mortgages issued minus repayments collected, was £922 million, down from a revised figure of £1.28 billion in August as homeowners continue to pay down their mortgage debt.

Activity remains dominated by homebuyers, who have been encouraged to return to the property market by more competitive mortgage rates and lower house prices. Borrowers with a 40 per cent deposit are able to secure a deal with an interest rate of 1.99 per cent from HSBC, while house prices remain 13 per cent below the peak in 2007.

The BoE figures showed that only 25,528 remortgage deals were given the green light last month, a 9 per cent fall compared to the previous month.

Homeowners are opting to remain on lenders’ low standard variable rates and defer the decision to lock into a new deal until there is evidence that interest rates could rise.

Commentators warned that an expected rise in unemployment and a reluctance by lenders to loosen the criteria for loans will hinder a further recovery in mortgage lending.

Seema Shah, of Capital Economics, an economic consultancy, said: “I doubt that the revival in approvals will gather much momentum. There is still a long way to go before lenders have the financing capabilities to loosen lending criteria meaningfully.”

Despite the boost in approvals last month, lending volumes remain at historically low levels, with the number of new loans down considerably compared to previous years.

Howard Archer, UK economist for IHS Global Insight, another consultancy, says that banks and building societies need to approve between 70,000 and 80,000 new loans a month to ensure that house prices remain stable and the market returns to "normal". An average 93,000 loans have been approved each month between 1993 and 2009, according to Mr Archer.

Separately, the Building Society Association (BSA), the trade body, released figures yesterday showing the gross mortgage lending jumped 24 per cent in September compared to the previous month. Mutual lenders approved £1.6 billion in loan last month, compared to almost £1.5 billion in August.

Adrian Coles, director-general of the BSA, said: “Lending activity has recovered in recent months, when compared to the start of the year, as buyers and sellers tentatively return to the market. However, lending is still at levels much below that of previous years, and the slight recovery remains fragile.”

Source: ' Times '

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