33% decrease in mortgage approvals

27 March 2008

New figures illustrate continuing downturn in property market

Figures from the British Bankers’ Association have today shown that the number of mortgages taken out for purchasing houses has decreased by nearly a third over the last 12 months to the end of February.

The figures further prove the existence of the continuing downturn in the UK property market.

This February, 43,870 mortgages were lent to customers by banks. This figure is slightly higher than that from January but still 33.2% lower than that seen in February 2007.

David Dooks, BBA statistics director, said: “In an environment of tightening lending criteria, re-mortgaging, either to fix, re-fix, or reduce borrowing costs, has been a clear influence on mortgage data in the first two months of this year, resulting in mainstream lenders picking up market share.

“Despite the relative pick-up in February’s reported retail sales, consumer credit and cards in particular, continued to be subdued.”

The UK housing market is slowing because of a ‘two-way squeeze’.

Firstly, banks are having difficulties when it comes to raising funds on the financial markets because of the current credit crunch.

This, in turn, means that the banks have reduced funds for lending to customers in the form of mortgages and other loans and so they have had to be more selective about whom they lend the limited funds to.They need to be sure they will get the money back and, to reduce their exposure to risk, will not lend to those with poorer credit histories. Interest rates are also pushed up because they need to make more money out of less investment.

Additionally, over the last few years, house prices have rapidly increased, forcing many potential home buyers out of the market and thus decreased the demand for mortgages.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, warned: “Buyer enquiries have slipped back to the lows seen in the wake of the Northern Rock crisis and this trend is likely to persist through the spring.”

The Bank of England governor, Mervyn King, told MPs on Wednesday that bank mortgage rates were still very close to those seen last August, despite two rate cuts by the Bank of England since then, bringing rates down from 5.75% to 5.25%.

Mr King said: “I would be surprised in a few years if house prices are markedly higher than they are now.”