Lending increases but outlook remains weak

Gross mortgage lending rose 10 per cent on a year ago to £13.4bn, its highest since July 2009, the Council of Mortgage Lenders said.

But the property market remained “subdued”, it added, as last month’s rise only served to offset a fall in July, leaving the underlying picture stable.

And it warned that a continuation of the eurozone debt crisis could reduce the amount of money banks lend to homeowners by eroding confidence from financial markets.

It said there are already signs of the crisis disrupting funding markets amid fears of Greek default and there is “a risk of conditions becoming stressed” if uncertainties persist.

There have been reports that the eurozone debt crisis threatens to push up mortgage rates as banks demand higher interest rates to lend to one another amid the risk of a Greek default and the slowdown in the world economy.

The three month inter-bank rate, or Libor, which is used to fund variable rate deals, recently rose to its highest level since July 2009.

But for the time being at least, record low interest rates mean mortgage offers remain relatively attractive, the CML added.

Howard Archer, chief UK and European economist at IHS Global Insight, said it was likely August’s rise was caused by homeowners remortgaging amid predictions that the Bank of England will not raise its interest rate from its record low of 0.5 per cent until 2013. There was no evidence of growth in advances for house buying, he added.

He believes house prices are likely to fall by around five per cent overall from current levels by mid-2012 as persistently weak economic fundamentals outweigh extended low interest rates.

“While housing market activity has edged up from its lows recently, there remains little sign of any real step up. Indeed, housing market activity remains weak compared to long-term norms,” said Dr Archer.

“Current heightened concerns over the domestic and global economies, and turmoil in financial markets, are unlikely to do much for consumer confidence and willingness to commit to buying a house in the near-term.”