Flow of home loans will shrink again, says Bank

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The Independent Online

In a further blow to hopes that housing prices may yet avoid a "double dip", the Bank of England has said that the supply of mortgage funding over the next three months is expected to shrink, the first such decline since the end of 2008. More ominously still, the Bank added that the demand for mortgages has also weakened over the second quarter of this year.

It comes after the Bank reported weaker-than-expected mortgage approvals trends earlier this week – May saw just £1.2bn of net funds advanced for house purchases, compared with a pre-crisis average of over £8bn per month. The Nationwide house price index confirmed the slowdown, with a minimal 0.1 per cent rise in prices in June.

On the reduction in the number of people in the property market, a trend also noted by the Royal Institution of Chartered Surveyors (Rics), the Bank said: "Lenders had expected demand to increase in the past three months, as the temporary effects from factors such as cold weather and the ending of the stamp duty holiday waned.

"But, for some, that anticipated rebound in demand had not materialised. To explain the weakness in demand, those lenders cited continued uncertainty about the outlook for interest rates, employment and the macro economy more generally.

"Demand for secured lending for remortgaging was reported to have risen in the second quarter, for the first time since the end of 2008. Lenders were not anticipating further increases in remortgaging demand, given that many existing customers were borrowing at low standard variable rates."

Well-publicised problems for the banks in refinancing their balance sheets and replacing official support with fresh deposits, wholesale markets and securitisations point to a contraction in lending over the next few months at least. The Bank said: "Lenders expected the availability of secured credit to fall back in the next three months; in part reflecting expectations that wholesale funding markets might tighten in that period."

However, credit availability for firms is expected to improve in the coming three months, albeit at a slower pace, and 20 per cent of the banks in the Bank of England survey expect a large increase in defaults next quarter. The Bank reported caution about the health of commercial real estate.

The major British banks face a £750bn refinancing challenge in 2011. Simon Rubinsohn, the chief economist at Rics, said: "This is broadly consistent with anecdotal reports suggesting that, although more finance is now available, large deposits are still required to access it.

"Against this backdrop, the likelihood is that the finance for the property market will continue to be in short supply for some time to come. The construction sector, with its need for development finance, will be particularly badly affected by this," he added.

Dougald Middleton, the head of debt advisory at Ernst and Young, said: "Deleveraging is a key theme for the corporate sector. But there is a looming issue around refinancing which will test the supply of credit, especially if banks deleverage. This is likely to drive an increase in defaults."

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