UK house prices 'to slump as credit crunch returns'

Image by Getty Images via Daylife

By Philip Aldrick

The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages.

To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive.

Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."

Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007.

Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014.

Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant... The contraction will put pressure on house prices ."

UK house prices 'to slump as credit crunch returns'

Related articles by Zemanta

• Repossessions at highest level since 1995 (guardian.co.uk)