The number of fresh UK mortgage approvals for house purchase plummeted by nearly 10% during December to the lowest level since at least 1999 - arguably the clearest warning sign yet for the UK residential property market.

Only 73,000 mortgages were approved in December for house purchase, down from 81,000 in November and more than 35% adrift of the recent peak last summer, according to seasonally-adjusted figures yesterday from the Bank of England.

Howard Archer, chief UK economist at consultancy Global Insight, said in the wake of the approval numbers that he had revised his forecast for the average UK house price this year from a 3% dip to a 5% fall. He flagged a "very real danger" of a steeper tumble.
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Archer had until recently predicted a flat outlook for house prices this year. However, both mortgage lending figures and house price surveys have pointed consistently in recent months to a significant weakening of the UK residential property market.

Seema Shah, property economist at Capital Economics, told The Herald last night: "It is definitely at that point where it is already looking quite bad."

December's 73,000 figure was the lowest number of loans approved for house purchase in any month since the Bank of England made changes to this data series in 1999, and was therefore hailed by some economists as the weakest figure since comparable records began.

Other economists meanwhile considered mortgage approvals to be at their weakest since the mid-1990s, given the data series goes back in a slightly different form to 1993.

Yesterday's figures chime with a survey from the British Bankers' Association last week, which showed the number of loans approved by UK banks for house purchase fell to a third consecutive record monthly low in December.

The approval numbers appear to highlight a need for further cuts in UK interest rates. The Bank of England Monetary Policy Committee, which cut base rates from 5.75% to 5.5% on December 6, is expected to reduce them by a further quarter-point next Thursday.

However, the extent to which it can ultimately afford to cut rates, to fend off a sharp slowdown in economic growth or even recession, will depend on the developing inflation picture.

Bank of England governor Mervyn King has made it plain that people's inflation expectations will be crucial to the MPC's deliberations, and must remain contained.

However, a survey yesterday from pollster YouGov and banking giant Citigroup showed people's median expectation of annual UK consumer prices index inflation in a year's time had soared to 3.3% this month. This was up from the 2.7% prediction of a month earlier, and above the 2% target set for the Bank by the Treasury.

Archer noted 3.3% was also the highest figure since this survey began in 2005.

At the same time, the housing market would look to be in ever-greater need of cuts in UK base rates. Notably, existing affordability problems for housebuyers have been exacerbated by the fact that UK banks, reeling from the global credit crisis, have been increasing the interest-rate margins they are charging on home loans and becoming more fussy about the type of lending they are willing to undertake.

Predicting house prices would "remain muted" in 2009, after a 5% fall this year, Archer hoped the downside would be limited by "the rising number of households, an overall shortage of supply, high employment, significant interest rate cuts over the coming year and the fact that few vendors are currently having to sell for distressed' reasons".

However, he warned: "There is clearly a very real danger that a sharp housing market correction could occur. A growing risk is that the economy suffers recession, or even extended weak growth, and unemployment rises significantly. This would be liable to lead to a marked increase in the number of people having to sell houses for distressed reasons, particularly given the extent to which many households have had to stretch themselves to the limit to buy a house.

Conversely, a sharp housing market correction would increase the risk of recession."

The Bank of England figures showed extremely anaemic demand for unsecured consumer credit, in the form of personal loans, overdrafts, and credit-card lending.

Consumer credit rose by only a net £600m in December - half of both November's increase and the average rise for the previous six months of £1.2bn.

Source: http://www.theherald.co.uk/business/news/display.var.2007029.0.
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