Grim picture for housing market in loan approvals

Fresh mortgage approvals for house purchase in the UK plummeted even further to yet another record low in May, according to industry figures yesterday which point to prolonged weakness in the residential property market.

The seasonally-adjusted figures from the British Bankers' Association show the number of new mortgages approved for house purchase in the UK by the big banks tumbled from 34,752 in April to 27,968 last month - 56% lower than in May 2007.

This May's number is the lowest since comparable records began in 1997 with the formation of the BBA's "major British banking groups" universe, following big building society conversions.

Yesterday's numbers from the BBA reinforce the notion that the Bank of England will be keen to avoid raising base rates if at all possible, in spite of the energy and food price-fuelled surge in benchmark inflation to a 15-year high of 3.3% in May.

Highly-regarded consultancy Capital Economics said yesterday that Scotland was likely to be the least badly-affected UK nation or region in terms of house prices.

Ed Stansfield, property economist at London-based Capital, told The Herald that house prices in Scotland were likely to fall by 20% to 25% in total between this year and the end of 2010 and noted this would be a significantly better outcome than the 30% to 35% fall predicted UK-wide over this period.

Any falls in Scotland would follow a 146% jump in house prices north of the Border in the last 10 years, based on Halifax's figures.

Stansfield said: "Of course Scotland is an area that usually stands out...as looking comparatively healthy. That is probably not to say the market is not overstretched but it is less overstretched than much of the rest of the country. If there is one single region you would say is going to do relatively well, it would be Scotland."

However, Stansfield emphasised the "key stimulus" for the current UK housing market troubles was the global credit crunch. Mortgage lenders have raised interest rates charged on many mortgages and hiked arrangement fees, as well as tightening their lending criteria, as they face up to hefty credit crunch-related writedowns and much higher costs of raising funds in money markets.

Referring to tight credit conditions, Stansfield said: "That doesn't have any regional colour to it. That is affecting all (geographical) parts of the economy pretty evenly."

He added: "We would still be talking prices off 20% to 25% in Scotland (from 2008 to 2010), but not necessarily the 30% to 35% we are talking for the rest of the country."

HBOS-owned Halifax in April predicted "low single-digit" percentage house price growth in Scotland this year, which it forecast would be the smallest rise for eight years.

However, amid fast-deteriorating market conditions, HBOS last week nearly doubled its forecast of the fall in house prices UK-wide this year from a "mid-single-digit" percentage to 9%.

Halifax will in mid-July reveal what happened to Scottish house prices in the second quarter, and would seem likely to revise its 2008 forecast for Scotland.

The Bank of England's Monetary Policy Committee, which cut UK base rates from 5.75% to 5.0% between December and April, discussed the accelerating deterioration in the UK housing market when it met three weeks ago.

Minutes of this June 4 and 5 meeting, published last week, state that Nationwide and Halifax's house price indices fell "by around 2.5% in May", and, setting out MPC members' views, they add: "On these measures, house prices had fallen by around 7% since their peak in the second half of 2007 and further significant falls were probable. The fall in mortgage approvals for house purchase ... indicated a rapid slowdown in housing market activity.

"Discussions with contacts in the housing market suggested that the pace of deterioration had quickened, particularly in the past two months, and appeared to have been driven by a significant tightening in the availability of mortgage finance."

Howard Archer, chief UK economist at consultancy Global Insight, said of yesterday's BBA figures: "More housing market data, more very worrying news that heighten concern that we are in for an extended, deep correction in the housing market.

"The BBA data graphically highlight that housing market activity is currently being throttled by stretched affordability and tight lending conditions Average two-year fixed mortgage rates are now around 6.75%, which is the highest level since 1998 and they could reach 7% soon given the recent significant rise in two-year swap rates. Potential house buyers now have to provide higher deposit levels, which is a major problem for first-time buyers."

Archer added: "Global Insight forecasts house prices to fall by 12% in both 2008 and 2009, before essentially flattening out in 2010. Furthermore, we consider the risks to these forecasts to be loaded to the downside, particularly if the Bank of England's next move is to raise interest rates."

The BBA said UK mortgage lending for all purposes rose by a net, seasonally-adjusted £4.0bn in May, having increased by £5.2bn in April.