Mortgage lending set for fall to 1980 levels

Mortgage lending looks set to fall to its lowest level for more than three decades during 2011 with first-time buyers particularly hard hit, a trade body warned today.

Net lending, which strips out redemptions and repayments, is expected to total just 6bn next year, down from an estimated 9bn this year and 110bn in 2006, before the credit crunch, according to the Council of Mortgage Lenders.

The group said the figure would be the lowest annual total since 1980, when the mortgage market was much smaller, and represent the most subdued growth since 1968.

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The fall is being driven by the shortage and cost of funds, as well as muted consumer demand.

The situation is being exacerbated by the fact banks will have to repay the remaining 130bn they borrowed through the Government's Special Liquidity Scheme by the end of next year.

The CML added that the Financial Services Authority's ongoing mortgage market review continued to be a "major and unhelpful source of uncertainty" for the industry, as lenders did not know when it would issue firm rules, or modify its current "excessively risk-averse approach".

The CML said: "Over the short to medium term, lenders will need to manage some large-scale re-financing of wholesale funding.

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"From April next year onwards, lenders will begin to have to re-pay the funding advanced through official support schemes. This is likely to limit the availability of credit to support mortgage lending next year, and beyond."

The group warned that the availability of mortgages for first-time buyers would remain "limited", as lenders were likely to continue to have only a "modest appetite" for lending to people with only small deposits.

It added that lenders' stance was being reinforced by the higher levels of capital they now had to hold on these loans due to Basel III.

The remortgage market is expected to remain subdued, as low interest rates mean people on their lenders' standard variable rate have little incentive to take out a new deal, while borrowers that would like to switch are unlikely to have enough equity in their property to be able to do so.

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Property sales are expected to remain broadly flat at just 860,000, down from 1.6 million before the credit crunch – a rate that suggests the average home will change hands only once every 20 years.

The CML said there was likely to be a "modest boost" in sales towards the end of 2011, in the run up to the current stamp duty exemption for first-time buyers purchasing a home for up to 250,000 coming to an end.

But the group, which based its forecasts on the UK avoiding a double dip recession, said public sector spending cuts suggested there would be a difficult jobs market and households were also likely to focus on reducing debt, suggesting demand for mortgages would be subdued for some time.

But on a brighter note, it said it was unlikely the base rate would rise significantly in the short-term, and could remain at its current record low of 0.5 per cent for the whole of next year.

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This should stop a sharp increase in the number of people who fall behind with their mortgage repayments or have their homes repossessed. But the CML is still forecasting a slight increase in both areas after seeing a sharp decline in the rate at which mortgage arrears levels are improving.

Overall, it expects 40,000 people to have their homes repossessed in 2011, up from an estimated 36,000 this year, while 180,000 people are expected to end the year in arrears of 2.5 per cent or more of their outstanding mortgage.

The CML is not predicting a sharp fall in house prices, although it expects the recent weakness to persist for some months.

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