Mortgages Fall by Half in Jan, Another Nail in UK House Prices' Coffin?

Mortgage approvals fell by almost half in January according to the latest release of data from the Council of Mortgage Lenders. This will undoubtedly add fuel to the second-crash-fire. In fact, this alone, particularly the number that mortgages have fallen to, could be seen as capable of bringing a second fall in prices on its own.

According to CML 32,000 homeowner loans were approved in January, some 49% down on December's 62,800. At the beginning of last year, the Center for Economics and Business Research said that if mortgage approvals had not reached 50,000 per month by the start of this year, then there would be a 40% peak-trough fall in house prices, which would happen in 2009 with prices stagnating this year and next. With prices having fallen 20% before bouncing back by 8%, this drop in mortgages could herald a sharp drop in prices.

Of course, this is just one month. The possibility that it is just a blip cannot be ruled out, especially given the freak weather the UK witnessed in January.

Unfortunately there is another more worrying explanation for the fall in mortgages: the government lowering the stamp duty threshold to its original £125,000 from the £175,000 it was raised to as a measure aimed at staving off the downturn. This happened at the beginning of January. That this is behind the fall in mortgages was backed up by the fact that mortgages to first-time-buyers were hardest hit, with a 54% drop. This is a more worrying reason than the freak weather, obviously because the weather is now gone, while stamp duty is here to stay.

The fall in mortgages certainly explains why the indices of Britain's two largest lenders, Halifax and Nationwide both recorded falls in UK house prices in February, of 1.5% and 1% respectively on the month.

The fall in mortgages could also explain the drop in buyers recorded by the Royal Institute of Chartered Surveyors, which said supply rose faster than demand for the second consecutive month in February. This is particularly worrying given that the price rises recorded since last March were being supported by a marginal rise in demand meeting a catastrophic shortage of quality supply in several key markets.

Like I say, the mortgage and demand drop off could all be a blip caused by the freak weather. Time will tell.

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