Mortgage approvals are down – and have just fallen to the lowest level ever. It is actually becoming a struggle to keep up, what with the British Banking Association, Council of Mortgage Lenders and Bank of England all releasing monthly data on mortgage lending, we have lost count of the number of times we have told mortgage lending has fallen to an all-time low, or the lowest level since such and such a time.
It feels as if barely a day passes without some new all-time low being passed.
The latest data from the Bank of England says this:
The value of mortgages approved, excluding re-mortgages, was £58 million in April. That’s half the level seen ten months ago, but, more to the point, even lower than the trough reached in the early 1990s.
Capital Economics has produced data which shows a correlation between year-on-year changes in mortgage approvals and annual house price inflation – but with a time lag of two or three months.
Or to put it another way, it appears house prices will follow the lending figures down – over the next few months. The Nationwide’s 2.5 per cent fall in house prices in May is just the beginning – if lending data is any guide then even bigger falls could follow.
All of a sudden, it seems analysts are talking about this downturn being even worse than the one seen in the early 1990s – something most analysts said was inconceivable not so long ago – although Investment and Business News has given umpteen warnings for at least two years now.
Capital Economics now says its prediction of a 20 per cent fall by the end of 2009 could be conservative. In fact, it said, “Indeed, even if approvals do not drop further but remain at current levels for the next few months, we could be looking at house price falls that are well into double digits by the end of the year.” And remember, it expects falls to be even greater in 2009.
Yesterday, a report from Gocompare.com said that nearly half of respondents to a recent survey it ran said their financial situation made them feel trapped in their current home. Only 14 per cent said they are likely to move in the next three years.
As long as people stay put, house price falls will be restricted – but the longer the downturn continues, the more people will be forced to move.
The cost of renting may well go up – as people stay away from buying houses. Then buy-to-let landlords with modest borrowing will see yield cover costs.
Ultimately, it seems we are likely to see a scenario of falling house prices and rising rents. Eventually, rent relative to a mortgage payment on an equivalent property will become expensive. At that point tenants will conclude it makes sense to buy, investors will conclude that the yield on property investments is such that even without capital growth the investment is still worthwhile. At that point, the market will turnaround. And the next cycle will begin.
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