The levels of mortgage lending in August shocked the market yesterday as it plunged to a 10-year low, with experts fearing that "doom-mongering" about a collapse in the recovery had hit consumer confidence.
The Council of Mortgage Lenders (CML) said gross mortgage lending last month was an estimated £11.4bn. It marked a 6 per cent year-on-year fall, and was 14 per cent lower than in July.
The numbers were at their lowest level in August since 2000, when lending hit £11.1bn. The CML said the second half of 2010 "was always going to be challenging. Looming public-sector spending cuts are an inevitable brake on the economy in the short-term."
The rise in house prices has run out of steam, demand is subdued and there are signs of more properties coming on to the market following the abolition of home information packs, the CML explained.
Brian Murphy, the head of lending at the Mortgage Advice Bureau, said mortgage activity always falls in August over July because of the summer holidays, "but the decline this year is certainly larger than we would expect on seasonal factors alone".
He added: "Public sector cuts, tax hikes and incessant doom-mongering about a double-dip recession is hitting consumer confidence hard."
The fear will be fanned by the numbers falling below the levels set in August 2009, according to Mr Murphy, "but the property market then was still in the early days of its revival and confidence was higher".
Experts believe that many prospective buyers will wait until next month, before committing to a new home.
"We should have a much clearer picture as to how the mortgage market is likely to perform for the rest of the year and in 2011 once the Coalition Government announces its spending review next month," Mr Murphy said.
Consumers have remained cautious and household incomes have been under pressure since the summer, according to the CML. As the financial sectors begin repaying government-funded support, it also "inevitably reduces the amount of credit that can be advanced to the wider economy".
Bob Pannell, the chief economist at the CML, said that despite the downbeat tone of much of the recent data, there were some positives: "The Bank of England is likely to keep interest rates at record lows for longer to support the economy. This will continue to alleviate payment pressures for many borrowers."
The CML added that there were a number of risks on the horizon, and that there was "unlikely to be a significant improvement in the housing and mortgage market for some time yet".