House prices set to slump even further as home loans stay scarce

The housing market faces a "double-dip" recession this year, with falling prices and a rising tide of negative equity hitting homeowners hard.

Latest data from the Bank of England shows mortgage lending is stuck at about half the level usually associated with a healthy market. The Bank also reports a disturbing rise in the volume of bad loans being written off by lenders – £3.2bn of loans to individuals went bad in the second quarter of this year, a record high, and a much worse rate of delinquency than for companies.

It suggests that the major banks will face further balance-sheet pressures if the economy slows down, and illustrates the financial hardship still being felt by many families, although easier laws on individual debt have also pushed personal insolvencies higher.

Observers say the data will increase pressure on the Bank to resume its policy of quantitative easing – injecting money directly into the economy to prevent a full-blown slump. Politically, it will add to the debate on whether the Coalition Government's deficit reduction programme is unnecessarily harsh.

New mortgage approvals edged up slightly last month to 48,722, a mere 70 more home loans than were forwarded in June.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, which uses the Treasury's economic model, said: "This provides further confirmation that the housing market is heading for a double dip.

"The figures for mortgage approvals, a proxy for activity, tend to be well correlated with prices and the latest figures clearly point to falling prices over the second half of this year and into 2011, particularly now that supply shortages have eased.

"Unemployment levels are high and could rise further as the public sector spending cuts begin to take effect, while household income growth and affordability are poor."

Crumbling consumer confidence and weakness in the financial sector are conspiring to keep the flow of new funds into the housing market subdued. The latest house price figures from the Nationwide building society will be published tomorrow and are expected to show a fall in prices last month, continuing the weakening trend seen since the start of the year.

Evidence of a coming house price fall has been building. The Royal Institution of Chartered Surveyors recently said house prices were slipping, with the balance of surveyors reporting rising house prices eroding. New buyer inquiries are at their lowest level since September 2008, and the reading for the number of new instructions – sales – is the second-highest reading since this series began in 1999.

There is anecdotal evidence that the long period of forbearance exercised by banks and building societies towards borrowers may be drawing to a close. In any case, the general trend in lending is weak.

The Bank of England said secured lending to individuals rose by just £100m in July, after a £700m rise in June. Unsecured net consumer credit rose £0.2bn. Thus, total net lending to individuals rose by £0.3bn: the three-month annualised growth rate fell to 0.5 per cent in July, from 0.6 per cent in June.

The National Institute of Economic and Social Research said last month that house prices would be lower in real terms in 2015 than they are now, pushing values back to 2003 levels.

Researchers at Capital Economics suggest that prices could dive by a quarter by the end of 2012, while the accountancy firm PricewaterhouseCoopers believes there is a 50 per cent chance that homes will be worth less in 2020 than in 2007. If so it will reverse much of the trebling of property values since 1997.