LONDON (Reuters) - Mortgage approvals fell to their lowest in 3-1/2 years last month, the British Bankers' Association said on Tuesday, adding urgency to hopes that a new official funding scheme will revive the moribund housing market.
One of the major obstacles to economic recovery is a lack of credit for companies and households, driven in part by banks' reluctance to lend due to the higher cost of obtaining funding in wholesale markets. Banks also blame pressure from regulators to strengthen their balance sheets.
Loans for house purchase have fallen 21 percent from a year ago to 26,269 -- the lowest since January 2009 when the credit crunch was in full swing, the BBA figures showed.
Analysts and lenders believe extra public holidays and rainy weather were partly to blame for June's weakness, and so expect a slight rebound this month.
Further down the line, they hope for a boost from the "funding for lending" plan, jointly announced last month by the finance ministry and the Bank of England, under which some 80 billion pounds of cheap loans will be made available to banks if they lend to households and businesses.
"We are pretty confident that it (the scheme) should have a positive impact on the flow of lending ... and the same with rates -- they should be slightly lower than what they would've been had it not existed," a spokeswoman for the Council of Mortgage Lenders said.
RBS (RBS.L), one of Britain's biggest banks, has already said it will use the scheme, due to start in August, to cut costs for first-time home buyers by offering low interest rates on a number of mortgage deals.
However, some economists doubt "funding for lending" will have a major impact on credit flows, at least in the near term.
"We do not think that the terms of the scheme will sufficiently change the banks' lending patterns, as they remain under continued pressure to maintain large liquidity buffers and increase their capital ratios," said Blerina Uruci of Barclays.
Moreover, subdued demand is also contributing to sluggishness in the housing market, with Britons wary of borrowing to buy a home at a time of economic uncertainty, high unemployment and government spending cuts.
Nearly all consumers have seen their living standards fall in the last 12 months, consumer lobby group Which? said in a report on a survey of 2,000 households, adding that people under 30 had faced the greatest squeeze and were failing to save enough.
According to data from mortgage lender Halifax, house prices are still around 20 percent below their 2007 peak, having tumbled at the start of the global financial crisis in 2008. Halifax said on July 5 that it expected little change in house prices in the remainder of 2012.
Additional reporting by Sven Egenter; Editing by Catherine Evans