Fears for house sales are fuelled by 39% fall in mortgage lending

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The property market slump seems set to intensify after the major banks revealed that the number of new mortgages approved in April was the second lowest on record.

Total home loan approvals came in at 38,704 last month, well below the six-month average and 39 per cent down on the level a year ago, the British Bankers' Association reported yesterday. The total was up slightly from 35,546 in March, the lowest figure since the BBA launched its monthly survey in September 1997.

The effect of the credit crunch was especially acute in the month following the collapse of the US investment bank Bear Stearns, as near-panic in the money markets pushed commercial rates ever higher and way beyond the levels set by the Bank of England and other central banks.

The freeze in the wholesale money markets pushed the real costs of a mortgage to an eight-year high in April, according to the most recent statistics from the Bank of England.

However, the "mortgage famine" may be easing slightly as market rates respond to renewed efforts by the central banks to stabilise the markets and restore confidence in the banking system by swapping mortgage-backed securities for government bonds. The recapitalisation of some large banking groups has also bolstered confidence, but most opinion polls suggest credit conditions are still severe.

In overall terms, April's underlying net mortgage lending was up slightly on the March figure, from £5.2bn to £5.4bn. However, that relatively optimistic-sounding improvement was accounted for largely by remortgaging activity, This was more than 20 per cent up on the figure for April 2007 as home-owners shopped around for lower rates.

The key indicators for the health of the economy and the housing market were all depressed. Savings inflows have improved, thanks to rising interest rates and the climax of the ISA season, although every pound saved is one denied the nation's retailers and housebuilders.

Consumer credit was down slightly as banks tightened their criteria and families sought to rein in their spending. But it was data from the housing market which caused most concern.

David Dooks, the BBA's director of statistics, said: "Pressures on household finances, stalling house prices and tighter lending criteria in response to lower liquidity are all constraining demand for house purchase and equity withdrawal loans, which are both well down on levels last year."

The number of mortgage approvals is regarded as a reliable leading indicator of future trends in house prices, and the BBA data is in line with evidence from the Bank of England and the Royal Institution of Chartered Surveyors (Rics). In its most recent survey, which is also viewed as a forward predictor of house price trends, the Rics said sentiment was at it lowest for 30 years.

Estate agents in some parts of the country registered a 100 per cent negative response to the Rics' regular question about whether house prices were rising. New inquires at agencies are at a record low and housebuilders are reporting the toughest trading conditions since the housing slump of the early 1990s.

Analysts were downbeat about the outlook. Michael Saunders, of Citi European Economics, said: "The housing market will get extra blows as, first, the sharp rise in swap rates in recent weeks feeds through to higher fixed mortgage rates in coming weeks and, second, job losses mount. An extended period of housing weakness remains likely."

An inadvertent recent "leak" revealed that the Government is anticipating a fall in property values of 5 to 10 per cent this year.

US housing market takes a plunge

House prices in the US fell more steeply between January and March than at any time since the Second World War.

The rating agency Standard & Poor's latest report, published yesterday, showed that the average value of homes had slumped 14 per cent in the first quarter from the corresponding period last year. The S&P/Case-Shiller Home Price Indices, a respected barometer for the state of the US housing market, showed that the plunge was the worst since its records began 20 years ago.

David Blitzer, chairman of S&P's index committee, said: "Things are pretty desolate. Not only is this the worst drop since records began, it is probably the worst since the Second World War."

The housing slump, and the wider economic slowdown, were sparked by a crisis in sub-prime mortgages, with the poorest householders defaulting. The S&P data found that in the first quarter the lowest-priced homes experienced the biggest decline on average.

Mr Blitzer said: "There are very few silver linings... Most of the nation appears to be on a downward path, with 19 of the 20 metro areas reporting annual declines." New York was not badly hit, falling 7.4 per cent, although Washington was on the national average, down 14.7 per cent.

Mr Blitzer pointed out Detroit was the only city where houses were, on average, worth less than in 2000. "Homes worth $100,000 [£50,600] at the turn of the millennium are now worth about $95,000. Everywhere else is up, most comfortably so," he added. Los Angeles homes have roughly doubled in value, while Miami was up by half.

Nick Clark