Mortgage lending falls to a nine-year low

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Mortgage lending dropped to its lowest level in nearly a decade last year, dragged down by four consecutive months of significant falls at the end of the year.

Annual lending of £136bn in 2010 showed a 5 per cent drop from the previous year and was the lowest total since the £120bn lent in 2000, the latest data from the Council of Mortgage Lenders (CML) shows. December's gross lending of £11bn was 6 per cent lower than the previous month and came in 18 per cent down on the same month of 2009.

The January Lending Report from the Bank of England, also published yesterday, confirms the picture of the housing sector battling significant headwinds. Mortgage approvals fell to a 21-month low of 40,000 in December, the Bank said, noting that the Credit Conditions Survey pointed to further falls in demand in the first quarter of 2011.

The CML says rising inflation, and the expectation of an increase in interest rates, may be a factor dragging down demand. "Money market rates have moved higher in anticipation of a rise in base rates and some lenders have reflected these increases in their pricing," CML economist Peter Charles said. "Against this backdrop, consumer demand may be weaker than otherwise expected."

The sharp year-on-year fall can be explained in part by a rush of activity towards the end of 2009 in the run-up to the stamp duty holiday expiry. And the cold snap in December 2010 will also have pulled down housing market activity. But the sharp drop nonetheless points to house prices remaining under pressure into 2011.

Howard Archer, the chief economist at IHS Global Insight, said the key factors over the coming months would be on the supply side. "It is clear that critical to the development of house prices will be the amount of houses coming on to the market, mortgage availability, how well the economy and jobs hold up as the fiscal squeeze kicks in, and what happens with interest rates," he said.