House prices set to fall 20% as mortgages plummet

HOUSE prices could fall more sharply than previously expected after mortgage approvals slumped to a record low.

The Bank of England revealed yesterday that just 42,000 mortgages were approved for purchase in May, 28 per cent down on April and 64 per cent down on the corresponding month last year.

It was the lowest level of approvals since the central bank began reporting the figures in 1993 and the 13th consecutive monthly fall.

Loans approved for house purchases were worth a total 5.8 billion, just over half the average for the previous six months.

Remortgages accounted for nearly two-thirds of all loans approved but were down by 10 per cent month-on-month.

Vicky Redwood, UK economist at Capital Economics, said the data pointed to house price falls of up to 20 per cent this year.

"The latest news on the UK housing market is absolutely dire, with the number of mortgage approvals for new house purchase slumping way below the early 1990s lows. And with fixed mortgage rates still rising, don't expect a recovery in housing market activity any time soon."

Howard Archer, an economist at Global Insight, concurred, saying: "Very low housing market activity seems certain to feed through to further depress already markedly weakening house prices."

Archer added that he expected house prices to lose 24 per cent of their value compared with their peak last August. The Building Societies Association's (BSA) update for May, also published yesterday, echoed the Bank's findings. It said net lending by building societies fell to 125 million, down from 1.3bn in May last year.

"It is important not to read too much into one month's very low figures," commented the BSA's director-general, Adrian Coles. "However, the figures do reflect the considerable adjustment in housing market activity. We expect activity to remain at low levels for some time."

However, the performance of building societies in the savings market remained strong. Mutuals attracted 853m of savings in May, up from 608m for the same month last year and the highest level for May since 2002.

And while sales of retail funds slipped in May, according to the Investment Management Association (IMA), there were signs of a return of confidence in investment funds.

Net retail sales of 653m compared poorly with 1.1bn for May 2007, but represented the second-highest level in the past seven months.

Richard Saunders, chief executive of the IMA, said: "May saw respectable levels of new retail investment, after the recovery in April.

"But sales are still well below the levels of 2007 and investors continue to remain cautious in their choice of asset class."