March 2008 saw the lowest ever number of people taking out mortgages to buy homes with the amount falling by 46 per cent over a year to 35,417 house buyers wanting loans.
At there peak, banks were handing out over 3,000 mortgages a day; however that number has slumped to just 1,100 per day, the smallest number since records began.
The figures released by the British Bankers Association reveal the remarkable evidence of a mortgage meltdown in Britain according to chief UK economist at the consultancy group, Global Insight, Howard Archer.
He said, “Mortgage activity is being pummelled by a toxic combination of stretched affordability and very tight lending conditions.”
Around 75 per cent of the loans available to consumers in the summer of 2007 disappeared, leaving just 4,000 mortgages for home buyers to choose from.
The Bank of England confirmed that the number of people deciding not to pursue a house purchase had risen as a result of being turned down for a loan. Just 129,300 mortgage applications were successful in March 2008, the lowest number since September 2000.
Mr Archer said, “The low level of mortgage activity is not only a consequence of slowing demand for houses due to the elevated affordability pressures facing potential house buyers, but also increasingly due to very tight credit conditions leading to markedly fewer and more expensive mortgages being available.”
The data highlighted a need for ‘concerted, sustained action’ to try and persuade banks to lend to each other, allowing for more liquidity to become available to fund mortgage lending and help rates come down.
Bank bosses met with Chancellor Alistair Darling and warned him that even a £50 billion rescue plan from the Bank of England may not have the desired effect on home loans for several months. The idea was to help banks lend money to homeowners at an affordable rate, whilst also allowing them to swap mortgage backed securities for up to three years for Treasury bills.
One senior City source spoke of how Mr Darling had been told at the meeting that the rescue plan wouldn’t make a difference for ‘quite some time’. The source said, “For now, mortgage pricing will remain high. If anything, it will increase in the short term.” This he blamed on the ‘stubbornly high’ costs of raising money in the money markets, which banks used to lend to customers.
Banks warned that people wanting to take out a fixed rate loan will end up being the biggest losers. Some fixed rate deals on home loans were already at their highest average rate since 2000, and these deals could continue to climb Mr Darling was told.
Executives from major lenders, Nationwide, Halifax, Abbey and Cheltenham & Gloucester were present at the meeting, as were a number of politicians including housing minister Caroline Flint and director general of the Council of Mortgage Lenders, Michael Coogan.
Mr Coogan said, “In the short term the trend of increasing prices and products being removed from the market is not going to be reversed. As and when the banks start lending to each other, the rate for lending will go down and that means that that will start to bring the price down but it is not going to be a dramatic reversal. It is going to be a slow process at best.”
Former member of the Bank of England’s monetary policy committee, Professor Charles Goodhart warned, “The likelihood of getting the mortgage market going again is slim. This just prevents things from getting worse. It is a backstop.”
Professor Goldhart predicts the Bank of England’s plan will aid the economy. He said, “The credit crunch will still hit the economy but it might have hurt more if it weren’t for these measures. The measures prevent the risk of a possible recession becoming a depression.”
