Will mortgage queues return?

By Ian Pollock Personal finance reporter, BBC News

The Northern Rock collapse dealt a shock to the confidence of buyers

When Northern Rock almost went bust last year, thousands of customers queued outside branches to get their money out.

Now, after just a few months, we may see the return of a phenomenon last seen in the 1970s - people queuing, at least notionally, for a mortgage.

The property market is slowing down dramatically and it has happened in a very short space of time.

During last September, October and November, lenders were giving about 80,000 mortgages a month to house buyers.

That was not as many as a year before, but was still a healthy level of business.

Then the predictions first made last autumn by the Council of Mortgage Lenders (CML) came true.

The mortgage tap was turned down, and lending to house buyers fell off a cliff; to 63,000, 51,000 and 49,000 in successive months.

'Inevitable'

This sudden downturn has been due to several factors.

We're seeing a slight re-adjustment in the market Martin Ellis, Halifax bank House prices see 'sharp decline'

Prices had shot up so much in the past decade that hardly anyone could afford to buy a house for the first time.

Jamie Dannhauser, from economic consultancy Lombard Street Research, says prices simply had to fall just because they had become so unaffordable.

"From the end of 2006 we could see a lot of indicators slowing down, such as the mortgage approval numbers and the monthly survey of the Royal Institution of Chartered Surveyors (Rics)," he says.

Add in the confidence shock caused by the Northern Rock collapse, and now the inability of banks and building societies to lend, and the situation has developed quickly.

With buyers becoming more cautious, and lenders becoming more choosy about to whom they will lend, a stand-off is developing: lenders cannot or will not lend; borrowers cannot or will not borrow.

Prices slide

As a result of all this prices are now being dragged lower and both the Nationwide and the Halifax, the UK's two biggest lenders, have changed their tune.

At the end of 2007 they were predicting that prices would be flat this year, ending 2008 with annual house price inflation at about 0%.

Now both are openly acknowledging what is staring everyone in the face - prices will probably fall further.

Other commentators suggest that the value of houses and flats might drop by nearly 10%, both this year and next.

But Martin Ellis, chief economist at the Halifax, likes to use words like "modest" and "slight" when describing the slowdown.

"We've seen prices come down over the last few months as we've seen the level of people interested in buying a home decline," he says.

"As a result of that we're seeing a slight re-adjustment in the market."

Benign economy

The government is anxious, in public, to downplay comparisons with the recession of the early 1990s.

That was the last time that prices slowed down as rapidly as they are doing now.

It is quite true that many things are very different, at least in the wider economy.

Interest rates are low not high. Employment is at record levels. Unemployment is low.

And people are not being thrown out of their jobs by the million and losing their homes by the tens of thousands.

But this may still not protect the housing market from some more big shocks.

Buyers may expect further price falls

The number of first time-buyers taking out a mortgage is already at its lowest level for 33 years.

For Jonathan Davis, from housepricecrash.co.uk, reality is now coming into line with his longstanding prediction of a big fall in prices.

"The big banks around the world have lost $250bn on sub-prime mortgages, which means they have to cut their lending by ten times that amount, or $2.5 trillion," he says.

"The amount of money being offered by the central banks does not even come close to that. The overall situation is that easy money and buy-to-let pulled the market up, and no money and no buy-to-let is pulling the market down."

Worse to come?

Now that thousands of mortgage deals on the UK have been taken off the market in the past few months, especially for sub-prime and buy-to-let borrowers, it looks as if a chicken is coming home to roost in a very obvious place.

The next three to four months will be critical to see the effect of the tightening of mortgage supply Jamie Dannhauser, Lombard Street Research

The house price boom of the past few years has been described as unsustainable for just about as long as it has been going on.

Michael Coogan, boss of the CML, thinks things are clearly going to get worse, at least in the short term, especially as buyers now expect prices to fall and not rise.

"Potential buyers are prepared to gazunder - undercut the asking price at the last minute - rather than meet the original asking price, so that's creating problems in individual transactions," he says.

"That's going to impact transaction numbers in the coming months."

But Lombard's Jamie Dannhauser points out that the latest figures on prices and sales only reflect what was happening late last year.

The more recent withdrawal of almost all mortgages worth more than 95% of a property's value has yet to feed through.

"The next three to four months will be critical to see the effect of the tightening of mortgage supply," he warns.

Once buyers begin to believe that house prices will fall further, many will have every reason to delay their purchase, and lenders may become even more cautious about their lending.

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