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Mortgages are the biggest casualty of the credit crisis as lending hits 7-year low

26 October 2007
The effects of the credit crisis continue to be seen and have taken the biggest toll on the mortgage market – approvals for mortgages fell 27 per cent for September compared to the same month last year.

This marks the fourth monthly consecutive drop and indicates a slowdown in prices, suggesting that the decline is gathering pace and the 10 year housing boom is over.

While the National Institute of Economic and Social Research has said it does not predict a crash in the property market, others are less optimistic, and foresee a crash worse than that of the 1990s when banks had to take huge bad-debt provisions after lending £40 billion to the commercial property industry; today, the banks are exposed to nine per cent of their lending being in commercial property – more than it was when the market last took a dive.

David Dooks, the British Banking Association (BBA) director of statistics, said: “Lower amounts of new mortgage lending and fewer loans approved for house purchase signal a weaker outlook for the mortgage market, particularly if loan supply reduces in the aftermath of the recent financial markets difficulties and borrowing costs remain at current levels.”

Indeed, some economists predict that the worst is yet to come, as fixed rates come to an end and higher interest rates could lead to more repossessions. Add to this tighter lending criteria and five interest rates in the last 12 months and there will be a further decline in those able to get a mortgage – many fear a property slump mirroring that of America.

The USA has been most affected by the crunch, with home sales down 25 per cent from last year as the market experiences historic levels of weakness. Two million American families face the threat of becoming homeless in a wave of repossessions that far surpasses the Government’s predicted 500,000 foreclosures. Sub prime mortgages with adjustable rates and ‘interest only’ loans are being held primarily responsible for the crisis which is causing property market lows not seen since the 1930s, and has the potential to push the US into a recession.

Other than America and the UK, few countries have been badly rocked by the crisis, though some are feeling a slight ripple. Germany and France, while their economies remain robust, have both experienced slowdowns in underlying growth, causing a drop in confidence. Spain has also experienced a slight economic slowdown, but remains insistent that its lending will continue to grow rapidly.

Fixed rate mortgage

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