Mortgage slowdown threatens home sales

Experts believe the chances of a recession have become more likely following the US credit crisis. They say cuts in interest rates might be necessary to stop the market slowing down.

Statistics from the British Bankers' Association show that 61,051 mortgages for home purchases were given the go-ahead in August, the lowest figure for six months and down from 71,178 on the same period last year.

The association, which represents high street names such as Northern Rock, said the number of new mortgages had fallen for three months in a row.

Buyers are apparently deserting the property market. There is also evidence that the industry is beginning to ration mortgages.

The association said the total number of mortgages agreed in August was 168,291, which includes loans for remortgaging. This was 8.8 per cent lower than the same month last year.

The value of these loans, including remortgaging, was £19.1 billion.

The figure for house purchase was £9.38 billion, down by £1.1 billion on July and below the £10 billion of August 2006.

Meanwhile, the international Organisation for Economic Cooperation and Development said cuts in interest rates would probably be needed to head off an economic slowdown.

It expects the property market to cool as part of a wider economic malaise.

"The interest rate increases over the last year, together with recent financial market volatility, are expected to slow the housing market," it said.

Of the wider economy, it added: "There is now a risk that growth will be weaker going forward, which could imply a need for interest rate reductions."

It also flagged the risk of a growing hole in Government finances as tax revenues from industry and the financial services fall away.

A house price survey published yesterday by the Nationwide shows the annual rate of house price growth fell back from 9.6 per cent to 9 per cent between August and September.

The building society expects this pattern to continue. The fact that banks, businesses and individuals will find it more difficult and expensive to borrow could have a profound impact on the housing market and the economy, it believes, including an slightly increased chance of stagnation and recession.

Nationwide's chief economist Fionnuala Earley said: "The financial turmoil that began in early August extended into September, dampening hopes that the uncertainty sparked by the crisis would blow over quickly."

She said mortgages would become more expensive and harder to obtain, adding: "While some lenders are still willing to extend loans with little or no deposit, such products are now more expensive, reflecting the extra risk involved."

The British Bankers' Association also found customers were borrowing less via credit cards and personal loans. The monthly total fell £400 million in August.

This is expected to feed through to poor sales for retailers and manufacturers in the run-up to Christmas.

Miss Earley said: "A slowdown in consumer demand now looks likely to pull economic growth below its trend rate in the coming quarters.

"A worst-case scenario is for the economy to stagnate or fall into recession, with large job losses forcing homeowners into unwanted sales."

Earlier this week, housebuilder Barratt said new homes sales dropped by up to 10 per cent in the week after the Northern Rock crisis as consumer confidence took a knock.

Howard Archer, chief economist at analyst Global Insight, said: "Going forward, housing demand seems set to lose significant momentum as it is increasingly pressured by affordability stemming from higher interest rates, modest real disposable income growth and elevated house prices."

The Nationwide has also predicted that the Bank of England will have to cut the base rate in the next few months.