Mortgage approvals plunge by 66% in a year

Would-be home buyers, businesses desperate for investment funds and bankers facing the possibility of ruin received unwelcome news yesterday from the Bank of England.

New figures from the British Bankers' Association (BBA) show that the number of mortgages approved for house purchases has fallen by more than two thirds in a year. It is now at its lowest level since records began in 1997.

The Minutes of the last meeting of the Bank's Monetary Policy Committee, held on 9 and 10 July, reveal a growing readiness to use higher interest rates to tackle inflation, with one economist, Timothy Besley, breaking with the usual attempt at consensus to vote for a quarter percentage point rise - "to ensure the Committee's credibility". One other member, David Blanchflower, who said earlier this week that the UK was already in a recession, opted for a quarter percentage point cut. It left the MPC split three ways in a 1-7-1 vote to leave rates on hold at 5 per cent, but the trend towards a "hawkish" view on inflation coupled with a pessimistic forecast for growth among Bank officials seems clear: "All members agreed that... the path of inflation in the near term would be higher and the slowdown in activity more pronounced." The European Central bank recently increased rates to prevent inflation becoming embedded.

Financial markets have already "priced in" a small rise in rates, and the Minutes strengthened the feeling among many economists that a hike in rates cannot be ruled out even as the economy weakens and the housing market is suffering acute distress.

Vicky Redwood, UK Economist at Capital Economics commented that: "The minutes bring the possibility of an interest rate rise back onto the agenda. Timing considerations appear to have been the only reason why at least some other members didn't join Timothy Besley, with the minutes stating that "any change in rates would be better communicated alongside the Bank's August Inflation Report". Nick Kounis, an economist at Fortis bank agreed: "The minutes underline that an interest rate hike in August remains a very real possibility." Though still important, however, recently the credit crunch and relatively high money market rates have effectively pre-empted any moves by the Bank to raise its official rate.

The release of the BBA's figures, which are considered a good indicator of short-term trends in the housing market, is also likely to put more pressure on the Government to start offering solutions to the problems.

Predictions for the future of the housing market remain bleak, with some ananalysts even suggesting that new mortgages could well have dried up entirely before the end of the year.

David Dooks, director of statistics at the BBA, said: "Another record low number of mortgages approved by the banks for house purchase means that the whole market is likely to be at its least active since the early 1990s."

The sudden drop in mortgage approvals has been partly caused by lenders raising their rates and fees at a time when most people - especially first-time buyers - are having trouble with their finances.

The figures also show that fewer people are choosing to move house, preferring to sit tight until the market regains a bit of stability.

According to the economic research consultancy Capital Economics, activity in the housing market "continues to be tormented by the combination of weak buyer confidence, the faltering economy and labour market, and the mortgage credit squeeze."