Financial thoughts

U.K. mortgage approvals fell to the lowest in at least nine years in May, a sign that the housing slump is deepening.

Banks granted 42,000 loans for house purchase, compared with 58,000 in April, the Bank of England said in London today. The result was the lowest since the bank's series began in 1999. Economists predicted a reading of 51,000, according to the median of 26 estimates in a Bloomberg News survey. House prices fell the most in seven years in June, Hometrack Inc. said today.

The U.K.'s worst property downturn since the early 1990s is threatening to tip the economy into a recession. While Bank of England Governor Mervyn King says there will be “extremely weak activity'' in the housing market, the fastest inflation in a decade is standing in the way of lower interest rates.

“For approvals to fall by so much in one month having already collapsed over the last year underlines the ferocity of the housing market slowdown,'' said Alan Clarke, an economist at BNP Paribas SA in London. The report “suggests the pace of house price declines will continue or even accelerate and the risks to economic growth have also risen.''

The pound slipped after the report, and was at 79.32 pence per euro at 10:13 a.m. in London.

The dearth of credit and slowing economic growth pushed property values down 1 percent in June from the previous month, the most since records by market researcher Hometrack began.

Abandoning Market

Trevor Williams, an economist at Lloyds TSB Bank Plc, said today's “huge drop'' in mortgage approvals shows first-time buyers have “been abandoning the market almost completely.'' Home loans in May were about one third of last year's peak.

U.K. banks are reining in lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $400 billion in losses and writedowns.

Shares of property-related companies such as Taylor Wimpey Plc and Bradford & Bingley Plc have lost more than two thirds of their value this year. Taylor Wimpey, the U.K.'s largest homebuilder, said today it's in talks with investors to raise money as it writes down the value of land amid a “sustained weak'' housing market.

HBOS Plc, the country's largest mortgage lender, and Bradford & Bingley are also turning to investors to replenish their balance sheets no teletrak payday loans.

`No End'

“There's no end in sight,'' said David Tinsley, an economist at National Australia Bank in London, who formerly worked for the U.K. central bank. “With inflation remaining elevated, we're unlikely to see rate cuts. But even if we did, it probably wouldn't help much.''

King said on May 14 that the country may experience the “odd quarter or two'' of contraction. The bank predicted that the annual rate of economic expansion will drop to around 1 percent early next year, the lowest since 1992.

Consumer confidence fell 5 points to minus 34 in June, the least since 1990, GfK NOP Ltd. said in a separate report. U.K. services output growth held at the weakest pace since 2002 in the three months through April as business services and finance contracted, the statistics office said today.

At the same time, households are still adding to a record 1.4 trillion pounds in debt. Net consumer credit rose 1.4 billion pounds in May, the most in three months, and credit card lending increased 0.6 billion pounds, the Bank of England said today.

Rate Cuts

In April, the Bank of England lowered the benchmark interest rate for a third time since December to 5 percent.

Commercial banks aren't passing that on to homeowners. The cost of a home loan fixed for two years with a 25 percent deposit rose to 6.27 percent last month, the highest since 2000, central bank data shows.

Faster inflation may make the central bank reluctant to lower rates further. Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade, and King said last week that the rate may exceed 4 percent later this year. The bank aims to keep the inflation rate at 2 percent.

“The bank's clearly concerned about inflation in the near term,'' said George Buckley, an economist at Deutsche Bank AG in London. “But those concerns should give way to growth worries and next year people will talk about when the bank starts cutting rates.''

Source