Mortgage approvals slump to record low

Published 26th Jun 2008

The number of new mortgages approved by British banks tumbled by a fifth last month to the lowest figure for more than 10 years.

The British Bankers' Association (BBA) said yesterday that mortgage approvals for house purchases plummeted 56% from May 2007, the biggest drop since the series began in 1997. The monthly drop of 20% between April and May this year was the biggest on record and the figure of 28,000 mortgages approved was the lowest on record.

Despite the announcement in April of a £50bn Bank of England scheme to free up the mortgage market, banks have continued to tighten lending conditions and have removed many products from the market, making it more difficult for potential buyers to secure a mortgage.

The average cost of a two-year fixed-rate mortgage broke the 7% barrier on Monday, according to the financial information firm Moneyfacts, to reach its highest level for more than a decade.

This came as the lending arm of Barclays, the Woolwich, raised the cost of some of its residential mortgage rates by between 0.3% and 0.4%. The move follows similar rate increases by a number of lenders including Halifax and Nationwide.

The figures are more bad news for the government which is anxious to revive the housing market and restore the economic feelgood factor of the past 10 years.

Alistair Darling, the chancellor, yesterday voiced government concerns with criticism that mortgage lenders were charging consumers too much. Mortgage arrangement fees have soared by 66% in the last 18 months, while the average fee for a fixed-rate loan now stands at £860.

"I'm very concerned that people ought to be treated fairly, especially people coming off fixed rates and going on to different rates," said Darling. "We have met the Council of Mortgage Lenders to try to reach an agreement to ensure that people are treated fairly, but if that isn't happening I will ask the FSA to pursue the matter."

Howard Archer, economist at Global Insight, said the latest data showed the housing market was "being throttled by stretched affordability and tight lending conditions". He said he now expected house prices to fall by 12% this year and next, and a possible interest rate rise by the Bank of England brought on by fears of inflation could lead to a bigger drop. House prices have already fallen about 9% since last summer's peak and many economists say they have much further to fall.

"Very low housing market activity seems certain to feed through to further depress already markedly weakening house prices," he said. "Those people who took out 100% or even 100%-plus mortgages within the last two years are particularly vulnerable to falling into the negative equity trap."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, believes that the figures suggest the actual level of transactions will decline further. "The sheer scale of the collapse in turnover will inevitably have real implications for the economy and make it hard for the Bank of England to accede to the wishes of the money markets and raise the base rate to combat inflation fears."

The shadow chancellor, George Osborne, used the figures to attack the government for failing to deal with the problem earlier. "These figures show that home ownership is being pushed beyond the reach of millions under Gordon Brown. This is yet another blow to people wanting to get a foot on the housing ladder.

"With living standards under threat from soaring prices, stagnant earnings and higher borrowing costs, millions of people are asking why Gordon Brown failed to prepare Britain to weather the economic challenges ahead."

The Liberal Democrat Treasury spokesman, Vince Cable, put the blame on the BBA. "I wish the BBA, which is now facing up to reality, had been equally clear-headed several years ago when it was already becoming clear that reckless, indiscriminate lending was feeding an unsustainable boom in house prices. This was bound to come to a sticky end."

Source: ' Guardian '

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