U.K. Mortgage Approvals Decline to Lowest Since 1999

By Jennifer Ryan

July 29 (Bloomberg) -- U.K. mortgage approvals fell to the lowest since at least 1999 in June as financial institutions curbed lending, deepening the housing slump.

Banks granted 36,000 loans for house purchase, compared with 41,000 in May, the Bank of England said in London today. The result was the lowest since comparable data began nine years ago. Economists predicted 37,000, according to the median of 24 estimates in a Bloomberg News survey.

House prices fell by the most in at least seven years in July, pushing the economy closer to a recession, a report by Hometrack Ltd. showed yesterday. Banks have cut back on lending to shore up balance sheets after the collapse of the U.S. subprime mortgage market, which has cost more than $468 billion in losses and writedowns worldwide.

``The numbers are very soft and are likely to get a lot weaker,'' said James Knightley, an economist at ING Financial Markets in London. ``House prices will continue to decline and could fall 10 percent this year.''

The pound was little changed after the report, trading at $1.9933 as of 10:09 a.m. in London.

The value of net home loans fell to 3.1 billion pounds ($6.2 billion) in June, the least since October 2000, the Bank of England said. The value of all mortgages dropped to 16.8 billion pounds, the lowest amount since 2001.

Loan Approvals

Customer-owned lenders approved 2.5 billion pounds of home loans in June, compared with 3.6 billion pounds in the same month a year earlier, the Building Societies Association said in an e- mailed statement today.

The average cost of a home in England and Wales fell 4.4 percent from a year earlier in July and will drop further in coming months, Hometrack said yesterday.

Bank of England policy makers said at their July 10 decision that ``the housing market downturn had gathered momentum'' while ``the financial sector remained fragile,'' minutes of their meeting published on July 23 showed.

The U.K. Treasury should rule out creating a government- sponsored agency like Fannie Mae of the U.S. to bolster mortgage funding, a study for Chancellor of the Exchequer Alistair Darling by former HBOS Plc Chief Executive James Crosby will show today.

The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, the Bank of England said on July 9.

`Sharp Falls'

Some mortgage providers are easing lending terms. Woolwich, a unit of Barclays Plc, the U.K.'s third-biggest bank by market value, said July 21 it will cut rates on some fixed-rate home loans by up to 0.32 percentage points after swap rates fell.

``We are probably not too far from the trough'' in lending, said George Buckley, an economist at Deutsche Bank AG in London. ``But even if approvals stay where they are, this would be consistent with continued sharp house price falls.''

The rate on a two-year interest-rate swap, which lenders can use to hedge against rising interest rates, was at 5.7495 percent today, down from a peak this year of 6.5145 percent on June 16.

Households, who have a record 1.4 trillion pounds of debt, added to their unsecured borrowings at a slower pace in June, today's report showed. Net consumer credit, which includes credit cards, personal loans and overdrafts, rose by 872 million pounds, the least in five months.

Bank of England policy makers voted to keep the key interest rate at 5 percent this month as they battled the fastest inflation in more than 11 years and the prospect of a recession. The bank will take its next decision on Aug. 7.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net