Page last updated at 10:26 GMT, Wednesday, 23 July 2008 11:26 UK

Mortgage approvals hit fresh low

Houses
The sales slowdown is likely to last for the rest of the year

The number of new mortgages approved by the major banks fell another 23% in June to a new record low.

The British Bankers' Association (BBA) said its members approved just 21,118 new home loans in June, down from 27,499 in May.

The figures were also 67% lower than in June last year.

The collapse in sales and fall in house prices has been caused by the mortgage drought, which was triggered by the credit crunch in the banking system.

The BBA said the number of homes sold in 2008 was likely to be the lowest since the recession at the start of the previous decade.

House prices are in line for further sharp falls in the months ahead, [and] will drop by 15% this year
Capital Economics

"Another record low number of mortgages approved by the banks for house purchase means that the whole market is likely to be at its least active since the early 1990's," said the BBA's statistics director, David Dooks.

Collapse

The figures for mortgages approved, but not yet actually lent, are considered are a very good indicator of near-term trends in the market.

Mortgage approvals graph

As such, they suggest that the collapse in sales is likely to continue for the rest of the year.

The BBA's members account for about two-thirds of mortgage lending but figures for all lenders, to be published next week by the Bank of England, are likely to show the same picture.

Last month they showed that approvals had fallen by 64% in the past year.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics), said: "The continuing lack of availability of mortgage finance is proving a major drag on the level of property transactions and is increasingly being felt in the real economy."

"The modest cuts in the costs of borrowing seen over the past few weeks will unfortunately provide little relief for first-time buyers," he added.

Choosy lenders

Although the Bank of England has cut interest rates since the credit crunch started last year, mortgage lenders have generally been moving their mortgage rates in the opposite direction.

House price graph

The average two-year fixed rate deal for a new borrowers is now around 7%.

Lenders have become much more choosy about the loans they will make as they have sought to ration their available funds.

A year ago it was easy to get a loan of 100% or more of a property's value.

Now, nearly all loans are for a maximum of 90%, and several lenders now demand higher deposits, of 15% or even 20%.

Even so, the current collapse in lending to home buyers is outstripping the worst predictions of even the gloomiest commentators.

"Housing market activity continues to be tormented by the combination of weak buyer confidence, the faltering economy and labour market, and the mortgage credit squeeze," said Capital Economics.

"House prices are in line for further sharp falls in the months ahead, consistent with our forecast that house prices will drop by 15% this year," it added.


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