Mortgage approvals drop 20 per cent in latest sign of slowdown

Further evidence of a slowdown in the housing market came yesterday as the Bank of England revealed figures showing that the number of mortgage approvals for home purchase fell from 108,000 in August to 102,000 in September, the lowest since July 2005. The number of approvals is down 20 per cent on the year.

The figures are much in line with last week's data from the British Bankers' Association showing a 27 per cent drop over 2006. However, as with the BBA data, house price inflation means that the value of approval is still rising. On this basis, net mortgage lending rose £9.8bn in September, the fastest growth since February.

Meanwhile, the Council of Mortgage Lenders warned that the five interest rate rises seen since the summer of 2006 will contribute to a 50 per cent jump in the number of homes that are repossessed during 2008.

The CML said the situation would be worse than previously expected because of the tighter lending criteria many mortgage lenders are now imposing, with the hikes in interest rates particularly acute for the estimated 1.4 million people who are due to come off fixed rate loans next year. Their loans were arranged when rates were much lower. As a result some homeowners will be forced to stay on the more expensive standard variable rates that they automatically move to when their fixed rate deals come to an end. The CML is expecting house price growth to fall from around 7 per cent this year to 1 per cent in 2008.

The impact of the credit crunch and a more "normal" scene in the mortgage market has been seen in an especially sharp drop this month in mortgage approvals by wholesale lenders, that is those institutions that are neither banks nor building societies, down from 32,000 in July, and 27,000 in August, to 20,000 in September. The rapid expansion of these lenders in recent years had helped to compress lending margins and fuel the housing boom. The sharp rise in their funding costs is pushing them out of the market.

Taking the property market data as a whole, most economists felt they were a sign of further contraction to come in the wider economy. Michael Saunders of Citi European Economics said: "All this tends to reinforce our view that the economy is set to slow sharply in the coming year, reflecting high private debts, the last year's Bank of England rate hikes, stretched housing valuations, plus the recent tightening in financial conditions".

But unsecured borrowing by consumers – credit cards, loans and overdrafts – rose by £1.4bn in September, up from £1.1bn in August. This is the highest growth since January 2006 and easily above forecasts for a small slowdown to £900m, the six-month average figure. Such evidence as this will be used by the hawks on the bank of England's Monetary Policy Committee to argue against any cut in rates next week.