Mortgage approval figures point to market slowdown

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UK Mortgage borrowing in September posted its smallest monthly increase in a year and a half, while approvals for home loans dropped to a four-year low, according to figures released yesterday which add to signs that the once rampant housing market is cooling down.

Bank of England figures showed that mortgage lending rose by £7.75bn last month, the smallest gain since April last year. That was an increase of just 0.9 per cent on the month, the slowest growth rate since June 2002.

The number of mortgage approvals - loans agreed but not yet made - fell to 89,000, the lowest since August 2000. This compares with 95,000 the month before.

Growth in unsecured lending also eased. Analysts said the figures indicate that the Bank of England has succeeded in slowing the housing market down at the right pace. The Bank has raised borrowing costs by a third since last November, notching up interest rates in five quarter-point moves to 4.75 per cent. David Hillier, at Barclays Capital, said the Bank's Monetary Policy Committee is likely to conclude that while housing market activity is slowing down on the back of recent monetary tightening, "it is not doing so at an alarming rate".

Some commentators were less sanguine. DeAnne Julius, a former MPC member who co-runs a hedge fund and heads Chatham House, said there is still a risk of a housing crash. "I don't expect one but I think the situation is such that it could well happen," she said. "House prices are out of line with fundamental value so they will come down. The question is whether they come down very gradually, in a way that is hardly noticeable, or whether they do come down rather suddenly."

Professor David Miles, chief UK economist at Morgan Stanley and author of the Treasury-commissioned report into long-term fixed-rate mortgages, said that a fall in property prices of 20-25 per cent cannot be ruled out. He said that the growing view that housing is overvalued could in itself be enough to cause a sharp slide in prices. But he stressed that the uncertainty surrounding the housing market is huge. The National Institute of Economic and Social Research also warned of a "high risk" of a housing slump this week.

The majority view is that the market will continue to cool but not crash, as it remains supported by robust economic growth and a strong labour market. The Nationwide building society reported this week that house prices suffered their first monthly fall in three years in October, but went on to say that a sustained period of falling prices seems unlikely while the jobs market remains strong.

Yesterday's mortgage data reinforced economists' expectations that the Bank will leave rates on hold next Thursday, while a growing number also think that rates have peaked. A Reuters poll this week showed 18 out of 44 analysts thought rates were at their peak.