Home loan approvals slump to a five-year low, says Bank

The number of new approvals for mortgage loans posted its smallest increase for almost five years last month, figures from the Bank of England showed yesterday.

The number of new approvals for mortgage loans posted its smallest increase for almost five years last month, figures from the Bank of England showed yesterday.

The drop in new business was accompanied by a slowdown in actual lending that analysts said pointed to a further slackening - or even a crash - in property prices.

Lenders approved 83,000 new loans in October, down from 89,000 in the previous month and a peak of 132,000 in December last year. The number was last lower in January 2000. The Bank said overall lending slipped to £9.07bn, its weakest level since November 2002 and down sharply from £11.66bn a year ago.

Alan Castle, the UK economist at Lehman Brothers, said the figures were consistent with the annual rate of house price inflation - now 18.5 per cent on the Halifax index - falling to zero by the middle of next year. "Given the recent soft data-flow the risks lie to the downside of this forecast," he said. Nationwide building society will today give the first snapshot of house prices in November.

Howard Archer, the UK economist at Global Insight, said: "The steady stream of markedly soft data are likely to fuel the Bank's concern that an 'abrupt' housing market correction could occur."

Analysts believe the next few months are key as they could see prices stabilise or suffer steep falls. "We are approaching a critical point in the housing market," Stewart Robertson, at Lombard Street Research, said. The new year often sees a rebound in both activity and prices after the pre-Christmas slowdown, although this might prove to be what stock market traders call a "dead cat bounce".

For many in the City the debate is moving on to what the impact of any sharp slowdown would be on the wider economy.

The Bank of England said this month it did not believe the house price boom had been responsible for strong consumer spending and so doubted it would trigger a crash as prices fell.

Michael Saunders, an economist at Citigroup who said prices would fall "slightly" next year, doubted it would trigger a consumer recession. "There will be enough offsetting positives from the recent marked loosening of financial conditions as well as the acceleration on household real wage and salary income, business investment and exports to keep the economy growing slightly above trend in 2005," he said.

But Stephen Lewis, the chief economist at Monument Securities, said: "There could be an asymmetry in the relationship. Even if house prices have had little impact on consumer spending while they have been on the way up, it is not reasonable to conclude they would have minimal effect if they collapsed."

There was some upbeat news on the consumer sector with a key confidence survey showing an unexpected rise this month. The GfK index rose to minus four from minus six as households became more upbeat about the economy, their own finances and their willingness to make a major purchase. "We can see that the consumer outlook for the next 12 months is brighter," Grant Montague, a director of GfK Martin Hamblin, said.