Mortgage Lending Dives Again!

The latest figures show that mortgage borrowing has fallen for three months in a row. This could mean more bad news for house prices.

Yesterday, in The Incredible Shrinking Mortgage Market, I warned that mortgage lenders have withdrawn over 6,400 different mortgage products in just three months. The global credit crunch has left mortgage lenders wary of taking on too much risk, so they have responded by cutting their product ranges.

Today, the Council of Mortgage Lenders (CML), a trade body which represents 98% of all UK mortgage lenders, warned of a sharp slowdown in mortgage lending.

The CML revealed a 12% drop in gross mortgage lending between August and September. Total mortgage lending for September was only £30 billion, compared to £34 billion in August. However, September's lending figure was a modest 2.5% higher than the £29.2 billion recorded in September 2006. Nevertheless, lending was also down month-on-month by 2% in July and 0.3% in August, so this is the third monthly fall in a row.

The CML usually expects a 5% fall in lending between August and September, largely thanks to seasonal differences and the holiday season. The bad news is that the 12% drop relates to the period before the credit crisis at Northern Rock, which suggests that lending will decline even further in October. Indeed, continued liquidity problems in the money markets are likely to have a negative impact on mortgage lending for the foreseeable future.

Fairly soon, it's likely that year-on-year lending comparisons will show a fall for a particular month. Perhaps lending in October 2007 will be lower than that in October 2006? After all, mortgage lenders are pulling products here, there and everywhere, making it much more difficult for people to borrow. What's more, five rate hikes in the space of a year have taken the Bank of England's base rate to its highest level since 2001. This has pushed up mortgage repayments and reduced affordability.

So, if there is a sustained, sharp fall in mortgage lending, what will be the impact on the UK's stumbling housing market? The best that property owners can hope for is a slowdown: a decline in the rate of increase of property prices. Then again, property values have risen for years in excess of their long-term average growth of 8.5% a year, which is completely unsustainable. My best guess is that the property market will go into reverse as buyers and sellers get spooked.

My concerns are reinforced by a report released today by the International Monetary Fund (IMF), which warns that the UK housing market is overvalued by 40%. The IMF believes that property values in Britain, Ireland and Spain are set for a property slump, following record price surges. The UK could end up following in the footsteps of the US, with nationwide house-price falls triggered by reckless lending and the widespread credit crunch.

Habitual Fool readers will know that I've been bearish (negative) on property prices for several years. Indeed, I sold my family home in spring 2005 and profitably invested the proceeds elsewhere. Since then, I've watched in disbelief as individuals take on record levels of debt in order to chase the property dream. It's this debt that I can't stand, not the property boom which has accompanied it. Alas, history has shown that debt-fuelled binges eventually bring down the house every time.

As asking prices, property transactions and mortgage approvals all start to fall, panic will set in and the tide will turn. You only need to look at the crisis at Northern Rock to see how shaky the public's faith is. Frankly, I'll be relieved when the property bubble bursts, we rediscover the joys of saving, and the biggest borrowing binge in history comes to an end. Finally, although I plan to buy another home at some point, I'm going to sit out at for at least two years while prices decline!

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