Mortgage lending slumps as 'stagnant' housing market stifles demand

Mortgage lending slumped to its lowest level for more than three and a half years during September as the stagnant housing market stifled demand, figures showed today.

A total of £17.7 billion was advanced during the month, 10% less than during August and 42% below the level for September last year, according to the Council of Mortgage Lenders.

The figure was also the lowest since January 2005, and the weakest figure for the month of September since 2001.

The group said there was typically a seasonal fall in mortgage lending between August and September, although the drop this year was more marked than usual.

It added that a combination of lower consumer demand and ongoing funding constraints meant mortgage lending was likely to remain subdued for the rest of 2008 and into the first quarter of next year.

CML director-general Michael Coogan said: "The mortgage market is open for business.

"But weakening consumer demand and ongoing funding constraints will dampen monthly lending figures for the rest of this year and into the first quarter of 2009."

He added that the CML now estimated that total lending for 2008 would be around £255 billion, down from £363 billion in 2007 and the lowest annual total since 2002.

The fall in net lending, which strips out redemptions and repayments, would be even more dramatic, at around only £40 billion, less than half the level of net lending of £108 billion in 2007, and below the CML's previous forecast of £55 billion for the year.

It would also be the lowest level of net lending since 2000, when advances on this measure reached £40.7 billion.

Mortgage lending has been hit by falling house prices, which have put people off moving home or getting on to the property ladder.

But it has also been constrained by the tighter lending criteria adopted by lenders in the face of the credit crunch.

The increasingly large deposits demanded by lenders in order for borrowers to qualify for the best rates is thought to have put many people off remortgaging, while higher rates and arrangement fees mean some are better off staying on their lenders' standard variable rate when their existing deal comes to an end.

While many lenders have now passed on the recent 0.5% reduction in the Bank of England base rate to their standard variable rate customers, tracker rates have generally not reduced by this amount.

Last week several lenders increased their tracker rates after wholesale funding costs failed to fall in line with the reduction in interest rates.

The key inter-bank lending rate, three-month Libor, upon which many variable rate mortgages are based, has remained stubbornly high since the Monetary Policy Committee cut rates at 6.16% on Friday  - 1.66% above the Bank of England base rate.

The CML figures also showed that mortgage lending was continuing to fall on a quarterly basis.

Total lending during the three months to the end of September reached £62 billion, 16% less than during the second quarter of the year and 37% below the same period of 2007.

Howard Archer, chief UK and European economist at Global Insight, said: "Another month, another awful set of mortgage data.

"The extremely low level of mortgage activity in September shows that housing market activity continues to be hammered by the highly damaging combination of extremely tight lending conditions and still-stretched buyer affordability."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The latest data from the CML highlights the continuing squeeze on finance in the housing market.

"Funding constraints remain the key issue for lenders at the present time despite the Government's attempt to revive mortgage lending as part of the recently announced recapitalisation programme.

"The goal, suggested by the Chancellor, of returning to the lending levels achieved in 2007 seems unrealistic in the current environment."