February 26, 2008 | posted by Michael Baxter in IABN |

Here is your mission. See if you can square the optimism flowing from the latest report from Hometrack, with some of the data which was revealed yesterday.

This is what the data said: According to Hometrack, house prices fell 0.2 per cent in February. It now has house prices down for five months in a row.

More to the point, the British Banking Association said yesterday that mortgage approvals for house purchases in January were worth £44.2bn. Okay, that may not mean much to you, but think of it this way, that was 31 per cent down on the same month a year before. In fact, if you were to track the BBA data back over the last ten years, it has only been worse than that twice – and that was in November and December 2007.

This is what Hometrack had to say: “February’s survey showed signs of improving demand with the first increase in new buyers“ and “While the latest survey reports prices down across a third of the country we expect the extent of these falls to slow over the coming months as demand continues to improve on the back of lower mortgage rates and a modest improvement in confidence.”

But before we drill down a little deeper, consider this. Yesterday, the Nationwide, which by the way provides 10 per cent of all mortgages in the UK, said that it is changing the level of deposit required for borrowers to receive the best rates, from 10 to 25 per cent.

So, on the one hand, Hometrack says demand will continue to improve on the back of lower mortgage rates; on the other hand, more and more evidence is emerging to suggest that, actually, for people wanting a new mortgage, rates are barely improving at all.

First, let’s take a gander at the data the BBA revealed yesterday.

Overall, mortgage lending saw one of its better months for some time. The value of gross mortgage lending in January hit £18.025bn. That meant January was the best month since October last year. It was down from January last year, which saw £18.907bn worth of mortgage approvals, but then that was the best January ever recorded. So, on the face of it, the mortgage lending data is not too bad.

But on closer inspection, this golden nugget of news turns to iron pyrites, when you realise that the strength of mortgage lending is down to re-mortgaging.

In fact, January saw the highest level of mortgage renewals ever recorded. Why is that? Well, think about it, you already know the answer. Remember all those mortgage resets we have been hearing about? Those 1.4 million fixed rate mortgages that are due to end during the next 18 months or so. Well, they are ending, just like we knew they were going to, and lenders are looking to replace them with alternative mortgages.

If, instead, you look at mortgages for house purchases, a quite different tale is revealed.

This kind of lending fell off a cliff in 2004 – coinciding with the previous slowdown in house prices, recovered a little in the following year, but has been deteriorating rapidly since.

The volume of loans approved for mortgage lending has now been less than 50,000 four months in a row. Yet, only on one occasion during the previous nine years had even one month seen similarly low approvals. And the last time there were four consecutive months of mortgage approvals being less than 50,000, was in 1998.

And now, consider that move announced by the Nationwide yesterday to require a 25 per cent deposit before it offers the best mortgage deals.  It seems pretty likely that mortgage approvals are not set for any dramatic improvement soon.

And to change the mood a little, let’s return to Hometrack. “Over the last 3 years,” it says, “the increase in new buyers registering with agents each February has averaged 25 per cent, almost 3 times higher than the increase seen over February 2008. The upward pressure on prices in previous years has been supported by the growth in the supply of housing for sale being lower than the increase in demand. Supply over the last 3 years for example increased by an average of 16 per cent compared to the average 25 per cent growth in demand. This year the supply of housing for sale has increased broadly in line with demand – hence the weakness in pricing levels.

“In some areas of the country, such as the East, North West and Yorkshire and Humberside and Wales, the supply of housing for sale has increased more than demand – these are areas where pricing is likely to remain under pressure in the short term.”

“Looking ahead,”says Hometrack, “while the latest survey reports prices down across a third of the country we expect the extent of these falls to slow over the coming months as demand continues to improve on the back of lower mortgage rates and a modest improvement in confidence.”

Ummmm, “… as demand continues to improve on the back of lower mortgage rates.” Well, that’s demand of course, providing you can afford a big deposit. With the price of oil still up there in the stratosphere, with wages including bonuses rising no faster than the retail price index, and with bonuses likely to fall, it is not obvious where all this demand is going to come from, and, with the credit crunch, how it will be financed.

With the recent decision by mortgage lenders to scrap 125 per cent mortgages, and with Nationwide’s decision to change the level of deposit required for the best deals, there is growing evidence that the banks are just beginning to pass the pain they have been feeling on to their borrowers.

The credit crunch also means that banks need more savers – and to reel them in they are trying to make savings rates more attractive – inevitably, as this occurs, reductions to the rate of interest instigated by the Bank of England will not be passed on in full by mortgage lenders.