The drop in re-mortgaging is an ominous sign for UK house prices

There was more gloom for the UK's property market this week, as the number of remortgages being approved fell sharply. Matthew Partridge explains why it matters, and what it means for Britain's house prices.

One of the main things propping up Britain's housing market is cheap money. The fact that you can get a mortgage for less than 3% means that even overpriced homes look tempting.

However, there's a catch. While the cost of loans is very low, the supply is as well. Many of the very best rates require deposits of 40% - a non-starter for most buyers. Even those who are able to get together that sort of deposit face almost unprecedented levels of scrutiny, with lenders looking for any excuse to knock back applications.

In many ways this is a good thing. The collapse in lending standards that fuelled the housing boom ended up lumbering banks (and more importantly, the taxpayer) with large amounts of bad debt.

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However, it does mean that with house prices still apparently defying gravity, they are very vulnerable to any further drop in lending. And that's exactly what the latest data on mortgage lending suggests is happening.

The latest seasonally adjusted figures from the British Bankers' Association (BBA) are clear. The total value of loans for new home purchases fell by 9.8% from £4.69bn in May to £4.23bn in June. Compared with a year ago, that is down by 11.4%. The number of loans came in at 26,929 - more than 20% lower than in June 2011, and the lowest reading since January 2009.

Things are even worse in terms of re-mortgaging activity. Indeed, both the total number of loans and the amounts approved have plummeted. The number of loans fell to 14,000, down 27.4% on last year. Meanwhile, the overall value of loans is sitting at just £1.95bn, a massive 38.9% decline in 12 months.

The really worrying thing is that this re-mortgaging data isn't just bad compared with last month or last year - you would have to go back over a decade to find comparable figures.

What do other reports tell us? The BBA data is useful because of its detail and long history. It is also adjusted according to the time of year, removing seasonal distortion (housing sales go up and down in a pretty reliable cyclical pattern, so seasonal adjustment accounts for this).

However, the BBA data only represents the big high street banks. In contrast, the Council of Mortgage Lenders (CML) data covers nearly all - 98% - of the market. So it may give us a better idea of what is going on.

On this front, the picture is mixed. The headline CML data is much less downbeat. They find that the number of house purchase loans went down by only 0.8% in June compared with the same time last year (they don't seasonally adjust the data). And the actual number grew slightly, by 1.8% year on year.

However, the re-mortgaging data is in line with the BBA's. In this case the year-on-year fall in the number of re-mortgages fell by 24.5%. The overall value fell by 18.4%.

Why the plunge in re-mortgaging matters

Why does this drop in re-mortgaging levels matter? Sadly, there is no data on the reasons and numbers of applications being refused. This means it is hard to tell whether it is borrowers or banks that are behaving more cautiously.

However, given all the spectacularly low rates appearing out there, you'd have thought home owners would be re-mortgaging left, right and centre. The fact that they're not, suggests that they simply can't - they don't have enough equity in their homes to do so.

And this is happening despite the 'Funding for Lending' scheme, which is designed to ensure that banks lend more in response for getting access to cheap money.

The most likely explanation for this reluctance to lend is that banks are still worried about the state of the property market. And while they are not willing to force the issue (and potentially drive down prices) by repossessing houses, they are trying to make sure that their overall exposure is reduced.

This is a deeply negative sign. If banks are cracking down on re-mortgages, then borrowers will have fewer options to deal with their debts. It also suggests that they have no desire to give first-time buyers an easy ride either. Given that the market needs easy credit at low rates to keep prices high, this could start to affect prices.

And if people have trouble re-mortgaging, then in the medium term we could see repossessions start to increase again. This would lead to more forced sales, and increase the supply of homes on the market. Both factors would push down house prices.

As many of you have pointed out, that's no bad thing. We should cheer lower shelter costs in the same way that we'd be happy about lower petrol prices. But in the short term, the impact of a big drop on the balance sheets of both consumers and banks could be very damaging to the already fragile UK economy.


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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri