Mortgages are dying out!

If mortgage lending remains weak, then house prices will follow suit...

Housing bulls enjoyed a small lift today, as data showed that mortgage approvals bounced back slightly after the winter slump.

After the storm, the thaw

As expected, severe winter weather at the turn of the year helped to depress mortgage lending.

Indeed, from November to December, the number of mortgages approved for house purchase fell by a tenth (10%) to under 43,000. By value, approvals for house purchase slumped by more than an eighth (13%) in December.

However, the number of approvals has since bounced back, rising 7% in January and a further 2% last month. Similarly, the value of approvals rose 6% in January and an extra 1% in February, as you can see from my first table:

Mortgage approvals since February 2010

Source: Bank of England, Lending to Individuals

However, despite this rebound from December's lows, these figures shouldn't give too much hope to those who believe that house prices are about to take off once more.

As my table shows, the number of approvals in February (46,967) was just 42 ahead of the figure for February 2010 (46,925). In other words, in terms of the number of loans being granted, the mortgage market is at a standstill.

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Likewise, growth in the value of approvals to homebuyers has ground to a halt. In February 2011, total approvals for house purchase were £6.3 billion, 1% below the £6.4 billion agreed a year previously.

New norm or phoney war?

Some financial pundits claim that recent weakness in mortgage lending and house prices is merely the market taking a breather before the traditional 'spring bounce'. I don't agree!

Take a look at my second table, which shows similar data for home loans, this time going back to 1995. This was the year that the housing market finally pulled out of its post-Eighties slump, when prices started to rise steadily.

Mortgage approvals for house purchase, 1995 to 2010

Source: Bank of England's interactive database

* Data not available for these years

As you can see, during the boom years of 1996 to 2007, between 1 million and 1.4 million mortgages were granted to buy homes. During this period, total lending for house purchase ranged from a mere £42 billion in 1998 to an incredible peak of almost £193 billion in 2006.

Of course, we all know what came next.

The first ripples of the credit crunch in early 2007 turned into a fully fledged financial tsunami. This caused house prices and stock markets to dive across the world. In the UK, we went through the longest, deepest recession since the Thirties, which contributed to a collapse in mortgage lending and house prices.

Since this downturn, approvals for house purchase haven't exceeded £80 billion, or less than half (42%) of their 2006 peak. Likewise, mortgage approvals for house purchases have collapsed and, in 2010, were just two-fifths (40%) of their 2006 peak.

Spring bounce or more weakness?

Despite mortgage lending and home sales plunging since 2007, some pundits claim that the housing market has entered a 'new norm' -- one which will see prices steadily recover from their spring 2009 lows.

I disagree. Instead, I argue that we are in the last stages of a 'phoney war' between sellers and buyers. When cash-strapped buyers finally win this war, sellers will be in for a shock.

When the coalition government's austerity measures really start to bite, we will see taxes and unemployment rise, while public spending falls. In addition, we will experience lower disposable incomes caused by higher inflation (the rising cost of living).

What's more, two schemes providing liquidity support to banks, the Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS), will be gradually withdrawn from April. This will drain roughly £250 billion from banks' coffers, putting more pressure on lenders and creating a second 'mortgage famine'.

Lastly, when the Bank of England raises its base rate later this year, in order to bring down inflation, mortgage rates will creep up once again. This will trigger a new round of defaults and repossessions, putting more downward pressure on house prices.

For the record, for house prices to return to their long-term average of 3.5 times average earnings, they would need to fall another 22% from here. Let's see what happens in 2011 and beyond...

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