Mortgage lending falls as housing market slows

Further clear signs of a slowdown in the housing market emerged today as lenders said the amount of money borrowed for mortgages fell significantly in August.

According to the Council of Mortgage Lenders (CML), total lending for mortgages slowed to ?25bn in August, 13% lower than in July and just 3% higher than August 2003. By contrast, July saw lending increase by 3% compared with June, and 13% compared with July 2003.

People's appetite for buying houses seems to have cooled following five interest rate increases over the past year; lending to people buying property, as opposed to remortgaging, dropped by 18% between July and August to ?11.9bn. Mortgages for house purchase made up 48% of total lending, down from 51% in July.

The number of loans made to people buying property fell by 20% to 104,000 in August, down from 130,000 in July and 116,000 in August last year.

Fewer people were ready to take a chance on interest rates too. The proportion of people choosing variable rate mortgages, where monthly repayments go up and down along with the Bank of England's base rate decision, went down to 56%, compared with 60% in the previous month.

The figures follow warnings from the Bank of England last week that house prices may see falls of up to 30%, while the National Association of Estate Agents said that eight out of 10 of its members believed prices had reached their peak.

Michael Coogan, director general of the CML, said: "This month's figures seem to suggest that the slowdown recorded by estate agents and reflected in recent approvals figures is beginning to make its way through the lending system." However, he added that we may be in for data showing "bumpy" progress in the market rather than a smooth, consistent slowdown.

"What does seem clear, taking all the market data together, is that the market is slowing down," Mr Coogan added. However, a crash in the property market may yet be averted: "While we need to remain alert to the possibility that there could be a bounce back next year if consumers become complacent about the future direction of interest rates, all the evidence so far points to the likelihood of an orderly soft landing, in line with our expectations."

The British Bankers Association (BBA), which released its lending figures today, said that mortgage lending had seen the weakest increase since June 2002, at ?4.4bn.

David Dooks, BBA's director of statistics, said: "Notably weaker mortgage growth in August came as no surprise following the sharp reduction in approvals seen in July and may be a sign that mortgage demand is moderating in the face of tighter household budgets and a slowing housing market."

Figures released today by the Building Societies Association (BSA) told a similar story. Gross lending increased from ?3.8bn in August last year to ?4.7bn this year. However, approved loans; those that have been agreed but not yet completed, fell to ?3.6bn in August this year, down from ?3.9bn in August 2003.

Adrian Coles, director general of the BSA, said the figures suggested we had "reached a turning point in the housing market".

Commenting on today's lending figures, Howard Archer, economist at investment firm Global Insight, said: "Evidence that the housing market is losing momentum is currently coming thick and fast. Markedly weaker mortgage lending and approvals in August, evident in the data today from the British Bankers Association, Building Societies Association and Council of Mortgage Lenders, points to a further softening in house prices in the near term at least.

He added: "It is still difficult to be totally confident that the housing market slowdown is more than just a temporary lull in activity, although we suspect that it is."

Although the Bank of England is likely to be pleased by its success in reining in the property market, Mr Archer said a quarter point increase in interest rates was still likely in November.