UK mortgage approvals collapse to record low of 42,000

Mortgage lending into the property market in effect collapsed during May, according to the latest figures from the Bank of England. The number of mortgages approved for house purchase fell to just 42,000 – the lowest figure recorded by the Bank since it began collecting this information 15 years ago.

Economists described the numbers as "alarming", "terrible" and "absolutely dire". Lending is now 70 per cent below the peak registered in November 2006; 60 per cent down on May last year; and 27 per cent down on April. Mortgage lending is running at about half the level seen in the last housing recession in the early 1990s.

The official figures cover first-time buyers, those moving house and buy-to-let mortgages. Re-mortgaging business, consumer credit and other secured lending is, however, holding up comparatively well. Net consumer credit was up by £300m on April, to a total of £1.4bn.

First-time buyers are faring especially badly. House prices are still at historically high levels, lenders are requiring larger deposits and mortgages are becoming more expensive. Typically, first-time buyers now have to find a deposit of £16,000 against about £11,000 in 2005 – a 60 per cent increase.

Interest payments eat up 19.6 per cent of their incomes, barely below the peak of 20.7 per cent last November. Lenders no longer offer the sort of 100 per cent-plus mortgages seen at the peak of the bubble. And even as the official Bank rate has been lowered, market rates have pushed the real cost of borrowing higher. The Bank of England said yesterday that effective rates on new borrowing were up from 5.77 to 5.8 per cent last month.

The news on mortgage lending was worse than City analysts feared and added to the pervading gloom enveloping the property market. Transactions are about half last year's levels, with dire consequences for any company associated with real estate, furnishings and appliances. The country's biggest house builder, Taylor Wimpey, said it was seeking extra funds as it warned of a "significant downturn" in the market and an expected £660m writedown in the value of its assets. John Charcol, a mortgage broker, announced 69 job losses and the closure of offices in Birmingham, Manchester and Guildford.

The credit crunch has seen the seizure of the residential mortgage-backed securities market, whereby banks and building societies could resell their mortgage books and raise finance for new lending. The Bank of England's Special Liquidity Scheme has allowed them to exchange older slices of their loan books for gilts, thus improving confidence in the money markets – but it is not available for new mortgage lending.

House prices have been in decline for six months, leaving them 7 per cent off the peak reached last autumn. Further falls seem inevitable. The consensus appears to be a 10 per cent drop this year and a similar decline in 2009, with the most pessimistic observers forecasting a 30 per cent fall by the end of next year, or around 40 per cent when taking inflation into account.

David Miles, a former government housing policy adviser, recently predicted that a "bear case" for the housing market, although unlikely, would see 3 per cent wiped off growth, enough to secure a recession.