June 25, 2013 7:04 pm

Mortgage approvals increase as housing market revival strengthens

New housing in Derbyshire©PA

High street banks approved almost 25 per cent more mortgages in May than the same month a year ago as the housing market’s revival gathered strength.

Data from the British Bankers’ Association show leading high street lenders approved about 36,100 mortgages for house purchases in May, the most since January 2012.

While approvals are still running at lower levels than in the years before the financial crisis, the figures add to signs that the government’s efforts to stimulate the market are having an effect, most significantly the Funding for Lending Scheme aimed at lowering banks’ borrowing costs.

House prices are starting to rise after years of stagnation. Estate agents say higher demand reflects improved mortgage rates and availability, the better economic outlook and the boost to confidence from the government’s “help to buy” scheme, which offers equity loans and guarantees to people with small deposits.

However, institutions including the International Monetary Fund and the Office for Budget Responsibility have warned the government’s intervention risks boosting demand and inflating house prices. The most potent part of the scheme will not start until next year.

Howard Archer, an economist at IHS Global Insight, said policy makers “must be prepared to quickly pull the plug on the Help to Buy mortgage guarantee scheme at the first sign of any housing price bubble developing”.

However, not all the BBA data pointed in the same direction. Net mortgage lending fell slightly in May, as it has for most of this year, after repayments outstripped gross lending.

“Mortgage approvals are gradually clawing their way back up after five years of very subdued activity, and government interventions are likely to mean this improvement continues,” said Matthew Pointon, a property economist at Capital Economics. “[But] the major banks are . . . still withdrawing credit from the housing market in aggregate, which will constrain house price gains.”

Mr Pointon also noted that interest rates have increased in the wholesale markets since the US Federal Reserve signalled it would soon cut the pace of its bond buying. “This argues against any further falls in mortgage rates,” he said.

The BBA data paint a more robust picture of mortgage availability than the latest official Bank of England figures, which include smaller lenders the BBA does not cover. The BoE’s data for April show mortgage approvals for house purchases were running about 5 per cent higher than a year ago.

But the BBA and the BoE data agree on the continuing lending drought for businesses. Net lending to non-financial companies fell £1.7bn in May, according to the BBA, in line with the average pace of contraction over the previous six months.

The BoE recently tweaked the Funding for Lending Scheme to boost banks’ incentives to lend to smaller businesses, but the housing market remains the major beneficiary of the scheme.

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