UK mortgage approvals halved from year ago

Wednesday, November 26, 2008

Mortgage approvals fell by more than half in October, according to figures which will increase the pressure on Alistair Darling to try to kick start the home loan market.

The British Bankers' Association said loans approved by the high street banks for house purchases fell to just 21,584 in October, down 52% on the same month last year. The total was the second lowest ever, just above the 21,363 record low set in August.

The fall confounded any hopes that the market could have been over the worst, which may have been sparked by a slight increase in approvals in September, to 23,383.

The number of approvals in the latest month was two thirds lower than that recorded when the market peaked in July 2007.

Net mortgage lending was £2.9bn, down 17% on September and well below the average of £3.9bn for the previous six months.

The BBA said unsecured lending to credit card and other borrowers was also subdued but attention will focus on the mortgage data. These will lend renewed weight to calls for more action to get UK banks to lend more freely.

On Monday, Sir James Crosby, former chief executive of HBOS, warned that with banks struggling to raise funding, net mortgage lending was likely to fall below zero in 2009. This would mean that repayments and redemptions outstripped lending.

Announcing the results of an investigation into mortgage lending, commissioned by the government, Crosby said that recent cuts in interest rates might help borrowers but would not necessarily lead to increased lending. He recommended the government act to kick start the securitisation market. This allows banks to raise funds secured against bundles of mortgages in wholesale markets.

HBOS made extensive use of such funding to support a huge increase in its mortgage lending during the housing market boom.

Crosby said mortgage lenders should be invited to bid for about £100bn of government guarantees over the next two years. The guarantees would be attached to high-quality mortgage-backed securities issued by the banks to fund new lending.

He said the guarantees would help attract investors back into the mortgage-backed security market, allowing lenders to reduce their funding costs.

Crosby said such intervention would improve the availability of mortgage finance to consumers and could help avert the risk of a protracted fall in house prices.

In his pre-Budget Report speech Darling indicated ministers supported the proposal. "I share Sir James's concerns about the avail- ability of mortgage finance."

The Chancellor cautioned: "To implement Sir James's recommendation, the government would need to obtain State Aid approval from the European Commission and resolve some technical and practical considerations. But we will proceed to work up a detailed scheme based on his recommendations and seek State Aid approval to proceed."

While the PBR included other measures to support the housing market, including support for borrowers who lose their jobs, Darling came under fire from an expert in mortgages yesterday.

"The Chancellor said he won't be reporting any further on Sir James' proposals until next year's Budget. The mortgage market needs access to additional finance now," said Ray Boulger, senior technical manager at John Charcol.

But some economists said that action to boost lending might have a limited impact.

Seema Shah, property economist at Capital Economics, said increasing the supply of mortgages would not be sufficient to offset the dampening effect on activity of the weaker economy.

Howard Archer, chief economist at Global Insight, said stretched housing affordability, rising unemployment and widespread expectations that house prices would fall further would weigh on prices.

Consumer credit increased by £300m in October compared with £100m in September.

Source: Theherald.co.uk