Housing crisis as home loans slump to new low

Britain's housing market is on the verge of another precipitous lurch downwards, data published yesterday suggests, with mortgage lending now at its lowest level since the height of the financial crisis in the final few months of 2008.

The Council of Mortgage Lenders (CML) said its members, which represent 94 per cent of the home loan market, made just 28,500 new advances during January, a drop of 26 per cent compared to December. The value of lending was down by 26 per cent.

While lenders almost always provide less mortgage finance in the first month of the year, the CML said "adecrease of this magnitude is greater than seasonal factors alone wouldexplain". January's figure was 12 per cent lower than the same month of 2009, itself a poor period for the mortgage market, when snow slowed the UK economy.

Housing market experts warned that the slump in lending suggested further marked house price falls were nowlikely. Last week, Halifax Bank said the average British home lost 0.9 per cent of its value in February, but Howard Archer, chief UK economist at IHS Global Insight, warned that this trend was likely to accelerate.

"The very weak CML data indicates the housing market started 2011 on the back foot and supports our belief that house prices are headed down further over the coming months," Mr Archer said. "We expect house prices to fall by around 5 per cent in 2011 andultimately to decline by around 10 per cent from their peak 2010 levels."

Michael Coogan, the director-general of the CML, said there was a chance December's snow, as well asuncertainty about the direction ofinterest rates, had skewed the data in January, and warned it would be premature to draw too many conclusions from the data. But he added: "Pressures on household budgets have been increasing both in terms of take home pay, and indirect tax measures such as the VAT increase and recent inflationary pressures, so we were expecting a fall in transactions early in the year."

The CML's data does include some encouraging signs, including a rise in the average loan-to-value offered to first-time buyers, from 77 to 80 per cent. That suggests the supply of home loan finance is becoming less constrained.

Still, estate agents called for lenders to do more. "These numbers keep getting worse despite two years of record low interest rates," said Peter Rollings, the chief executive of Marsh & Parsons. "Nobody is calling for a return to the irresponsible lending of a few years ago, but the choke on mortgage finance is stifling buyers who want to take advantage of the value there is in much of the UK property market."

The continued mortgage market slowdown reflects lack of demand as much as supply, however, with the prospect of interest rate rises likely to be a further depressing factor. Public spending cuts, further tax rises and higher unemployment are also likely to restrict demand for housing, though the relatively small number of new homes coming on to the market should mean house price falls do not become too dramatic.

The collapse of the mortgage market – prior to the financial crisis, around 90,000 new mortgages were beingadvanced each month – is also continuing to hit the construction market. The Office of National Statistics warned yesterday that construction output fell by 13.9 per cent over the three months to the end of January, not least because a modest recovery in housing starts now appears to have gone into reverse.