Mortgage lending slumps to level of 1990s housing crash

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Wednesday, April 30, 2008

Fears that the British economy could be sliding into recession intensified last night, with the latest figures from the high street and the housing market showing a dramatic decline in activity.

According to the Bank of England, the number of mortgage approvals for new house purchases fell from 72,000 to 64,000 in March, a level not seen since the housing crash of the early 1990s. The number of approvals is running at about half the level of the peak reached last year. The number of mortgage approvals is a reliable forward indicator of trends in house prices.

The value of lending, at £6.9bn, is the lowest level since March 2005 and mark-edly below the £8bn monthly average for the previous six months. Other forms of consumer credit were similarly down.

The Bank of England's data shows that the credit crisis is continuing to bite, with the Nationwide building society the latest institution to tighten its lending criteria, imposing a minimum 10 per cent deposit on new customers.

The Bank of England's Special Liquidity Scheme may in due course help return the housing market to a more normal condition, but few observers think it will prevent house price reductions over the next two years of anything from 10 to 33 per cent. The Bank rep-orted that consumer credit also weakened further.

Nervousness about the housing market contributed to another gloomy month for retail sales. The CBI said its latest distributive trades survey showed that year-on-year retail sales fell markedly in April. Poor weather and the early Easter added to the economic slowdown to dent spending. Sales of items such as furniture saw some of the biggest falls. Some 52 per cent of retailers said sales volumes were down on a year ago, compared with 25 per cent who said they were up. The rounded balance of -26 was the weakest since November 2005. It is not expected to improve much, signalling further falls in sales volumes.

The three-month moving average – which smooths out monthly volatility – slipped from +1 in March to -9 this month, continuing its downward trend since last summer. Ian McCafferty, the CBI's chief economic adviser, said: "There is no doubt that consumers are tightening their belts as the mood about the economy and its outlook worsens. Now we've seen a fall in sales volumes, particularly so for goods related to the housing market." Nor are households very confident about future trends. The GfK/NOP baro-meter of consumer confidence is at its lowest level since November 1992, with the greatest drop in confidence in the general economy over the last 12 months.

The outlook could hardly be grimmer. Howard Archer, economist at Global Insight, said: "We expect consumer spending will be seriously hit by major headwinds which include muted real disposable income growth, markedly tighter lending conditions, a substantially softer housing market, lower equity prices and increased debt levels. Household purchasing power is being dented by higher utility bills and elevated food prices, while many homeowners are re-fixing mortgages at significantly higher rates. We suspect that unemployment will start to rise later in 2008. Likely further gradual interest rate reductions will help the consumer, but only partially offset these headwinds."