Mortgage lending slumped to its lowest level in a year in February, falling by seven per cent to an estimated £24 billion, six per cent lower than this time last year, according to the Council of Mortgage Lenders (CML).

Mortgage demand remains strong, maintains Michael Coogan, CML director general, but this level of lending cannot be fully satisfied with lenders’ existing funding. ‘This has led many lenders to reduce their product ranges, increase their mortgage prices and, in some cases, reduce their lending capacity,’ he says.

‘We have entered a substantially slower phase in the housing market and there will be ongoing problems in the mortgage funding markets unless the Bank of England makes new, broader based attempts to improve levels of liquidity in the UK,’ he argues. ‘As credit conditions change markedly from day to day, lenders will continue to rapidly adapt their products and pricing to match. This is a vital response to the uncertain conditions.’

Global Insight’s Howard Archer says these figures indicate that housing was already being pummelled by stretched affordability and tighter lending practices even before the recent escalation of the credit crunch, and he foresees house prices falling by five per cent in both 2008 and 2009.

‘The downside for house prices will be limited to some extent by the rising number of households, an overall shortage of supply, high employment, further gradual but steady interest rate cuts over the coming year and the fact that few vendors are currently having to sell for “distressed” reasons,’ he explains. ‘The current escalation of the credit crunch means that there is an increased risk that a significantly sharper housing market correction could occur.’

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