Crash worries grow over housing market

Residential housing sale and letting signs are seen in Hastings, January 3, 2008.

LONDON (Reuters) - Fears of a property market crash mounted on Monday after new figures showed approvals for home loans plummeting to a record low and the consumer mood at its bleakest since the onset of the recession in 1990.

The Bank of England said mortgage approvals -- perhaps the best pointer to where house prices will go -- fell 28 percent in May to just 42,000, around a third of their level a year ago.

Actual mortgage lending rose by just 0.3 percent, its weakest rate in 12 years. Analysts said the housing market looked set for a long and serious downturn and that could have a serious impact on the wider economy.

"Approvals are now pointing to house price falls of 15 to 20 percent this year," said Vicky Redwood of Capital Economics. "With the housing market going into freefall, it's only a matter of time before consumer spending growth weakens sharply."

Consumers are already down in the dumps. The GfK NOP consumer confidence barometer fell to -34 in June from -29 in the month before. It's only been worse one time in the survey's 34-year history, just before the last recession started in 1990.

The central bank's hands appear tied, however. Inflation hit 3.3 percent in May, its highest in more than a decade, and could soon stand at double the central bank's 2 percent target as world oil prices hit record highs above $140 a barrel.

Markets are betting interest rates will rise this year to tame inflation. Analysts say that is unlikely given the dire data but growth-boosting rate cuts also look off the cards.

NO REBOUND?

Prime Minister Gordon Brown is banking on an economic recovery next year -- growth this year is expected to be the slowest in 16 years -- to revive his battered popularity in time for an election pencilled in for April 2010.

But at this rate, he looks very unlikely to get it. "Declines in housing activity and consumer confidence will likely reinforce each other in the months ahead, which should eventually provide a significant hit to consumer spending," said Peter Newland, economist at Lehman Brothers.

Figures out last week showed that faced with soaring household bills and petrol prices, Britons were already almost running on empty, saving less of their income than at any time in the last 50 years.

Furniture and household retailers are being hard hit by the downturn and construction firms have also been reporting a sharp drop in activity.

Britain's biggest housebuilder Taylor Wimpey warned on Monday of a "significant downturn" in the housing market as it sought extra funds to help it stay afloat as the value of its assets dropped.

Sterling deposits held by UK companies outside the financial sector fell 0.5 percent on the year in May, the first fall since the series began in 1997, according to Bank figures on Monday.

"The deterioration in liquidity completes the picture of strain and suggests that significant weakness in investment and job growth lie ahead as firms retrench," said Michael Saunders, an economist at Citigroup.

"All this fits in with other signs that the economy is set to weaken further and stay soft for an extended period."

(additional reporting by Christina Fincher, Jeremy Lovell and Kate Kelland)