More mortgages help stabilise property market – but at a price

In a further hopeful sign for the property market, official figures yesterday confirmed the apparent stabilisation in house prices seen in recent Halifax and Nationwide house price indices.

Prices rose by 1.6 per cent between May and June, their third increase in a row, the Department for Communities and Local Government (DCLG) said. Indeed, the rises appear to be accelerating in line with the loosening of credit conditions – the DCLG reported rises of 0.1 per cent in May and 0.6 per cent in April.

Many observers say the modest price increases seen in recent months point to a shortage of supply and the activity of a few cash-rich investors rather than a general revival. However, the easing of mortgage finance is also helping. The Council of Mortgage Lenders said yesterday that the number of mortgage approvals jumped by 23 per cent to 45,000 from May to June, and their value rose by 26 per cent to £5.9bn. However, this is still lower than a year ago, when the figures were already at a depressed level.

Where mortgages are granted they tend to be to those with large cash deposits and on increasingly steep terms. The Bank of England said yesterday that banks' lending spreads remained wide in July on mortgage loans and unsecured consumer loans.

Since the credit crunch began two years ago, the bank rate has fallen by 5.25 per cent to its current all-time low of 0.5 per cent. Two-year swap rates, closely linked to fixed-rate deals on mortgages, have fallen by 4.1 percentage points.

But home loan rates have fallen by much less: 2.4 per cent for new tracker mortgages,and by 1.6 per cent for a two-year fixed mortgage. Overdraft rates are at their highest since 1995.

Michael Saunders, of Citi European Economics, said: "Over time, wide lending spreads should lift bank profits and capital, hence encouraging banks to lend more freely. However, the process may be quite lengthy, implying an extended period in which poor credit availability will likely remain a drag on the economy."