Fears of a long and painful downturn in the UK economy have grown after separate reports showed approvals for new home loans tumbled to a record low while growth in the manufacturing sector ground to a halt.
The Bank of England reported seasonally-adjusted mortgage approvals for house purchases slumped to 58,000 in April from 63,000 in March.
This was the lowest level since comparable records began in 1993 and only half the 2007 peak of 115,000 seen in May.
Furthermore, mortgage approvals were down 48.7 per cent year-on-year in April. The Bank also revealed that mortgage lending retreated to £6.4 billion in April – the lowest level since November 2004 and markedly below the £7.5 billion monthly average for the previous six months.
According to Howard Archer at Global Insight, the mortgage approvals data shows house buying is under severe pressure from the “toxic combination” of stretched affordability and tight lending conditions.
“Elevated affordability pressures on potential house buyers stem from high house prices and modest real disposable income growth, while still tight credit conditions are leading to significantly fewer and more expensive mortgages being available. Furthermore, potential house buyers now have to provide higher deposit levels, which is a particularly major problem for first-time buyers,” he added
Global Insight now forecasts house prices to fall by ten per cent in 2008 and 12 per cent in 2009.
“We see extended downward pressure on house prices coming from serious buyer affordability constraints, limited and often more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and reduced prospects for further interest rate cuts in the near term at least,” he added.
“The marked deterioration in sentiment over the housing market also heightens the risk that house prices will fall sharply over the next couple of years. On top of this, unemployment is now starting to rise, which along with a substantial number of homeowners having to re-mortgage at higher rates, is increasing the likelihood that people will have to sell their house for distressed reasons.”
Bank of England policymakers appear powerless to offer any succour in the form of interest rate cuts this week because their hands are tied by inflation already running a full point above the central bank’s two per cent target.
``The activity side data argue for rate cuts, but inflation concerns continue to suggest they will not be forthcoming.’’ said Malcolm Barr, economist at JP Morgan.
Official figures showed approvals for new home loans unexpectedly falling to 58,000 from 63,000 in March, as banks hit by a global credit crunch make borrowing terms harder. The figure was the lowest since comparable records began in 1999.
Many experts are now warning of sharp falls in house prices that could repeat the crash of the early 1990s that trapped millions in negative equity - when mortgage debt exceeds the value of their homes.
``Data clearly suggests that house prices have much further to fall, and if anything, our forecast for house prices to have declined by around 20 per cent by the end of 2009 may be slightly conservative.’’ said Seema Shah of Capital Economics.
Manufacturing activity, meanwhile, failed to grow for the first time in three years in May, according to a report from the Chartered Institute of Purchasing and Supply.
But while the overall manufacturing index fell to 50.0 in May from 50.8, signalling a standstill in growth, prices continued to rise fast, highlighting the Bank of England’s dilemma as the soaring cost of fuel is pushing up inflation.
The BoE has cut interest rates three times to five percent since the global credit crunch began last year but is now expected to hold steady for a few months until inflation shows signs of coming down.
Only two out of 71 analysts polled in a survey predicted a cut at this Thursday’s Monetary Policy Committee meeting, suggesting there will be little relief for the country’s housing market or wider economy for a while.
Lenders have even been raising the cost of their fixed-rate mortgage products because of expectations of higher interest rates ahead.
``Tough economic times lie ahead and any sense that ``the worst is over`` would be misplaced.’’ said Michael Saunders, economist at Citigroup. ``Plenty more bad economic news is likely to emerge in coming months.’’