Mortgage approvals fall almost 50%

by Kay Murchie

According to figures from the British Bankers Association (BBA), there were just 35,417 new mortgages approved for house purchases last month – 18% lower compared with the previous month.

Compared to March 2007, approvals were down 46% – the lowest figure for over a decade.

The slump in mortgage lending by the UK’s biggest banks is a result of the credit squeeze and how banks are tightening their lending criteria as they find themselves restricted by the shortage of funds.

David Dooks of the BBA said the consequences of low banking sector liquidity show up clearly in March data – reduced product ranges and tighter criteria resulted in slower mortgage lending and significantly fewer loan approvals.

The BBA’s members make up approximately 70% of all mortgage lending in the UK.

The tightening in the credit crunch is continuing to take its toll on the residential property market, according to Simon Rubinsohn of the Royal Institution of Chartered Surveyors.

The Bank of England’s latest swap scheme with the banking sector should help provide a little more liquidity for lenders, but is not going to turnaround the current challenging environment overnight, added Mr Rubinsohn.

Banks are warning that mortgages won’t become cheaper and could get even more expensive over the next few months.

A senior City source warned for now, mortgage pricing will remain high. If anything, it will increase in the short term.

The City source blamed the ’stubbornly high’ cost of raising money in the money markets, which banks use to lend to customers.

Michael Coogan of the Council of Mortgage Lenders said in the short term the trend of increasing prices and products being removed from the market is not going to be reversed.

As and when the banks start lending to each other, the rate for lending will go down and that means that that will start to bring the price down but it is not going to be a dramatic reversal. It is going to be a slow process at best, concluded Mr Coogan.

Housebuilder Persimmon shuts new sites

by Kay Murchie

Housebuilder Persimmon has announced it is to stop building on new sites until market conditions improve, which could result in tens of thousands of job losses.

The country’s biggest housebuilder by market value and No.3 by homes built said sales in the first four months of 2008 had declined 24%.

Traditionally, April is the busiest time for house builders but Persimmon said that in the last 3 weeks it had experienced lower sales volumes and increased cancellation rates.

Chief executive, Mike Farley, blamed the fall on unprecedented conditions in the mortgage market and urged the Government to scrap stamp duty for purchases under £250,000 for all first-time buyers for at least a year.

Mr Farley added it is entirely possible the industry could build only 110,000 homes or less this year.

Shares in the housebuilder fell 6% following the news.

According to building industry sources, the Northern and Yorkshire regions had already experienced job losses.

Many contractors believe the downturn could be worse than the early 1990s slump. When half a million construction workers were laid off between 1989 and 1994.

Last month, the housebuilder said the numbers of visitors to its show homes this year is improving but converting those to sales ‘remained challenging’.

Last year, Persimmon completed 15,905 homes, down 4.8%, while average selling prices increased 1% £189,558.

In January 2006, Persimmon acquired UK housebuilder Westbury plc for a consideration of £643 million.

Property prices could now fall 30% warns fund manager…M&G Optimal Income fund

by Kay Murchie

Recent reports have suggested property prices in the UK could fall anywhere between 5% and 20%.

However, a leading fund manager has warned that house prices in the UK could crash by around 30% from their highest levels recorded last summer.

Richard Woolnough, who manages the M&G Optimal Income fund, said history suggests when the UK housing market crashes, it tends to fall about 25-30% from peak to trough in real terms.

But given that UK house prices increased around 270% from 1995 to the end of 2007, there is a risk that this crash could be worse, explained Mr Woolnough.

Mr Woolnough’s predictions echo those of the International Monetary Fund (IMF) who recently said UK property is overvalued by 30%.

In addition, figures from the British Bankers Association (BBA) show there were just 35,417 new mortgages approved for house purchases last month – 18% lower compared with the previous month.

Compared to March 2007, approvals were down 46% – the lowest figure for over a decade.

Mr Woolnough believes mortgage approvals are a reliable predictor of UK house prices six or seven months ahead and current data imply year-on-year falls of between 5-10% by early autumn.

A projection is likely to worsen, said Mr Woolnough, because the banks are becoming increasingly reluctant to lend, which means mortgage approvals, and therefore house prices, could fall much further.

Mr Woolnough believes the only solution is for the Bank of England to slash interest rates in order to encourage borrowing again, which will eventually revive the housing market.