The Bank of England has announced that mortgage lending is beginning to slow, as the global credit crunch appears to take its toll on the industry.
As the fallout from the collapse of the US sub-prime market continues to have an effect on the global economy, the UK's central bank has reported that the number of mortgage approvals during August dipped from 120,000 to 109,000 compared to the same month a year ago. According to the bank, mortgage lending has been on the wane since the start of 2006, fuelled in no small part by the increase in interest rates during the past 12 months.
Interest rates have been raised from a low of 4.5 per cent in August 2006 to 5.75 per cent at present, with the bank's monetary policy committee (MPC) pressured into the increases due to rising inflation at the end of last year and the beginning of 2007. At one point, inflation jumped above the government's target rate of two per cent by a full one percentage point, but continued interest rate rises helped to bring inflation back down.
However, the global credit crunch combined with much lower inflation and the slowing mortgage market means that the MPC may now begin to face some pressure to reduce interest rates. Those in the property industry are concerned that the high level of the base rate could stifle the sector and there remain some concerns that it could precipitate a crash, particularly if the global economy shows little sign of recovering in the final quarter of the year.
The Bank of England's results on house prices have been backed up by research carried out by the Royal Institution of Chartered Surveyors (Rics), which also discovered a slowing mortgage market. Rics economist Simon Rubinsohn told the BBC: "Rics' monthly housing market survey is showing a sharp drop in new buyer enquiries and we expect this to be reflected in a further fall in activity levels in the housing market over the coming month."
Housing equity withdrawal has been particularly hit by the higher borrowing costs, the central bank found, dipping by £3.1 billion between the first quarter of 2007 and the second quarter.
The MPC is not expected to change the base rate when it meets this week, but there is a growing body of experts pushing for the rate to be cut before the end of the year. At the beginning of 2007, it was widely predicted that interest rates would reach six per cent before the end of the year, but a sharp dip in inflation, combined with a tightening in the credit market, has now made a cut more likely than a rise.