Surprise jump in mortgage lending » Housing » 24dash.com

There was a surprise rebound in mortgage lending during January with total advances jumping by 11%, figures showed today.

The Council of Mortgage Lenders said £163;26.5 billion was lent during the month, up from £163;23.92 billion in December, and in line with the figure for January last year.

The group said it was a good performance given the unsettled conditions in both the housing and mortgage markets since last summer.

Mortgage lending is traditionally lower during January than in December, as a result of lower loan applications in December as consumers instead focus on Christmas.

But despite the unexpected leap in lending, the CML warned that volumes were expected to be lower in the coming months following a fall in mortgage approvals towards the end of 2007.

Michael Coogan, director-general of the CML, said; "Gross lending held up well in January. However, there is considerable uncertainty in the housing market at the moment and we expect lending volumes to be lower in the coming months."

He added that, in the short-term, demand was likely to come from people who were remortgaging, with an estimated 1.4 million people due to come to the end of fixed-rate deals this year, rather than from people buying a new home.

David Page, an economist at Investec Securities, said he was surprised by the rebound given the very weak remortgaging figures that have been reported in recent months.

He said: "The mortgage approval numbers are very, very weak. While the mortgage approvals remain at the lowest level since 1995, it is hard to see where further lending growth will come from and we expect some softening in lending going forward."

The latest lending figures come after a member of the Bank of England's interest rate setting Monetary Policy Committee (MPC) warned that falling house prices and a drop in mortgage availability posed the biggest risk to the economy.

Kate Barker said it was likely that house prices would decline in the short-term relative to earnings, adding that falls in nominal terms could not be ruled out.

But she said the constraint was more likely to be whether or not lenders were willing to meet demand for borrowing.

In a speech to the North Staffordshire Chamber of Commerce, she said:
"The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil.

"There are clear signs of a marked weakening in both the commercial and residential property markets."

She warned that if the present difficulties over accessing wholesale funds were prolonged for lenders, there could be a fall in the availability of home loans during 2008.

She said: "In this case the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders' balance sheets, reducing lending capacity further."

She added that if credit tightening proved to be more severe than in the MPC's present central projection, and this led to a significant fall in lending to households and companies, this could cause a further drop in property values.

She said: "The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below-target inflation."

But Ms Barker said even if house prices fell by 15%, which she described as a "very pessimistic assumption", only 5% of people with mortgages and just 2% of all households would find themselves in negative equity.

Ms Barker also said CPI inflation is likely to be considerably above the 2% target for much of the rest of 2008, adding that there was "little that monetary policy can now do to dampen this peak".

She said: "Unfortunately, the strong upward inflation pressures in the UK today make it difficult to argue for large reductions in Bank Rate to reduce this downside risk."