Hopes that the housing market was recovering have been dealt a blow by news that mortgage approvals fell in March. They had increased slightly in February, but the overall trend remains a reduction in mortgage finance for home purchases and re-mortgages.
A picture of decline
The sheer collapse in mortgage lending can be seen by the fall in approvals for home purchase loans from their height of 80,000 in October 2006 to little more than 20,000 last month. The year-on-year fall in lending is also pronounced, at nearly 40% below their monetary values of March 2008.
But credit card borrowing actually rose last month and grew over the year by 8.5%. This suggests that consumers are responding to economic difficulty by increasing their personal borrowings - and also that the high street banks still have the capacity to lend. The ongoing fall in mortgage lending may, then, imply a continued lack of confidence by banks in home buyers' ability to repay and in the current valuations of properties.
Fragile
David Dooks, director of statistics at the British Bankers' Association - which published the figures - says: "Lending to households continues to grow, as banks make funds available for people who meet their lending criteria, but consumer confidence is fragile and unlikely to change demand markedly in the near-term. The banks’ figures also show it would be unrealistic to expect the mortgage market to recover in a steady and consistent way in the current economic environment."
This sense of fragility and weak confidence in the housing market was emphasised by a recent report from the credit ratings agency Moody's, which downgraded nine of the largest building societies on the basis of societies' assessed ability to cope with a fall of house values of 60% from their peak. At present, home values are - in most of the UK - on average about 20% below their peaks.
Further falls possible
While house prices have begun levelling out in recent months, it cannot be assumed they will not drop further. From here, they may fall or rise in coming months. There is an argument that housing affordability is at its best for years; that underlying demand is high, the supply of homes is failing to meet that demand and that we are therefore about to see a sustainable recovery in house prices.
However, the contrary analysis is that unemployment is expected to increase substantially in coming months; many small (and large) firms could go to the wall; and house prices remain, even after their heavy falls, still some way above their long term average in comparison with average incomes.
Above all, as the latest mortgage approval figures show, lenders are constrained both in terms of capacity and inclination from opening-up the lending gates at the moment. It looks likely to be a long, hard year for the property market.
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credit card borrowing actually rose last month and grew over the year by 8.5%. This suggests that consumers are responding to economic difficulty by increasing their personal borrowings - and also that the high street banks still have the capacity to lend.
