The housing slump is here to stay

Mortgage approvals are in the gutter. One survey suggests that house prices are failing to keep up with inflation. And one lender has started asking buyers for a 25% deposit. Should we be worried?

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News from the British housing market just keeps getting worse.

Mortgage approvals are in the gutter. One survey suggests that house price growth is now failing to keep up with inflation in other words,house prices arefalling in real terms.

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The optimists are still clinging desperately to the hope that falling interest rates will save the market. (Remember that the UK base rate is now 0.5% below where it was at the start of the credit crunch last August).

But those hopes look like being dashed, now that one of the country's top mortgage lenders has admitted that it would rather turn away business than dish out any more risky loans

The UK housing market is looking more sickly than at any point since the housing crash of the early nineties.

Figures from the British Bankers' Association (BBA) yesterday showed that remortgages in January accounted for a record 49% of all mortgage approvals, as borrowers desperately sought to lock in the best deal they can. The number of loans actually granted for house purchase rose to 44,288 in January from 42,343 in December down around 33% on the same time last year, and one of the lowest figures on record.

Meanwhile, research group Hometrack said that house prices fell 0.2% in February. Annual growth fell to 1.4%, well below inflation. Hometrack's survey also indicated that house prices fell on an annual basis during the 04/05 slowdown, so it is one of the more bearish pieces of housing market data. But it's still very badnews for the market.

The BBA data also showed that consumers paid off more on their credit cards than they spent repaying a net £300m, while overdrafts fell too, with outstanding loans down by £100m. That's good news for individual consumers, but not great for an economy which has been dependent on debt-fuelled spending to keep it afloat for so long.

Lenders are chasing margins, not market share

There's no sign that the impact of the credit crunch is going away. In fact, it's getting worse. Nationwide building society now requires buyers to stump up a deposit of 25% or more in order to secure its best rates. As the Evening Standard points out, with the average house in London valued at more than £300,000 (for now at least) that stacks up to a deposit of £75,000.

Nationwide writes one in 10 mortgages. So why is it tightening up? A spokesman told The Telegraph it's because "the cost of funding is higher and the housing market is cooling." He continued: "What we would like to do is continue to lend strongly but with an eye on quality. If the only way of doing that is to accept a smaller market share, then we will."

As Melanie Bien of Savills tells the Standard: "We're not seeing anyone going after market share. Instead they are increasing margins. Six months ago you could tracker rates at just below the Bank of England base rate, but now they are at least 0.5% above the base rate."

There can be no clearer illustration of why the housing market is not going to recover from this. Prices are going to fall, and they will fall for an extended period of time. Lenders have realised that they've allowed borrowers to stretch themselves too far, and now they're worried about the number of bad debts they've stacked up for the future. More to the point, if they want to use any future mortgages to raise money from the wholesale markets, they need to make sure that they are only of the highest quality so that they can get a decent rate.

The obvious result is that only extremely high-quality credit risks will be able to get good rates on mortgages, while everyone else will be left scrabbling for what they can get. That means we can kiss goodbye to the days of six times salary loans, for example.

Say goodbye to the 125% mortgage

People still can't grasp what that means. A columnist in the Evening Standard the other day decried the demise of the 125% mortgage, complaining that it was the only way for poor Londoners to get on the housing ladder. What she didn't seem to understand is that it's precisely because 125% mortgages have been available that house prices have got so incredibly out of control.

If she's genuinely worried about affordability, she shouldn't. If no one can buy at current prices (which they won't be able to, because banks won't lend them the money to do so) then prices simply have to fall. That's the beauty of markets.

Incidentally, amid all the talk of housing weakening, it's interesting to note a comment made by Harriet Harman in The Independent yesterday. Answering a series of questions from readers, Ms Harman came across exactly as you'd expect a New Labour MP to come across arrogant, bristlingly defensive at any hint of criticism, and also frighteningly ignorant.

When asked by one reader if it was true that she had remortgaged her house to fund her campaign to become deputy leader, she answered: "Yes. And I trust Alistair Darling will keep interest rates low!"

We're always complaining about financial literacy, or the lack of it, in this country. But when even a member of the cabinet doesn't know who's responsible for adjusting the country's most important economic variable in case you're reading Harriet, it's Mervyn King, the governor of the Bank of England - then what hope is there for everyone else?

Or perhaps Ms Harman knows more than she's letting on. Maybe Alistair Darling's enjoying running Northern Rock so much that he's decided to go for the governor's job next. Now that's a scary thought.

Turning to the wider markets...

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Good news on bond insurers boosts US

London's blue-chip FTSE 100 index added 111 points yesterday but failed to break through the key 6,000 level, closing at 5,999. Alliance & Leicester led the FTSE risers on rumours of a bid from LLoyds TSB. Fellow financials and housebuilders dominated the gainers. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 gained 94 points to close at 4,919, with financials including Credit Agricole, BNP Paribas and Dexia again leading the way. Over in Frankfurt, the DAX-30 was 76 points higher, at 6,882.

On Wall Street, news that Standard & Poors had reaffirmed the credit ratings of two bond insurers, MBIA and Ambac boosted the markets. The Dow Jones rose 189 points to end the day at 12,570, led by retailer Home Depot which is due to report its earnings today. The S&P 500 was 18 points higher, at 1,371. And the tech-rich Nasdaq was up 24 points, at 2,327.

In Asia, the Japanese Nikkei had fallen 89 points to 13,824, whilst the Hang Seng had risen 445 points to 23,714 in Hong Kong.

First may lose 'Worst Great Western' franchise

Crude oil had fallen back to $98.90 this morning, whilst Brent spot was at $97.32 in London.

Spot gold fell 1% following the US Treasury's announcement that it will support gold bullion sales by the IMF. Having fallen to a low of $926.40, the yellow metal had since climbed back up to $929.00. Silver had fallen back from yesterday's 27-year high of $18.15 to $17.97 this morning.

Turning to forex, the pound was steady at 1.9677 against the dollar and 1.3246 against the euro. And the dollar was at 0.6730 against the euro and 107.95 against the Japanese yen.

And in London this morning, the Department of Transport said that FirstGroup may lose the First Great Western rail franchise if it doesn't improve its service. The service, dubbed 'Worst Great Western' by passenders, is the most poorly-performing in the country in terms of punctuality and reliability.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.