Mortgage lending at lowest growth rate since 1986

MORTGAGE LENDING by banks and building societies dried up in October as the housing market came to a near standstill, new figures from the Central Bank show.

As lenders tightened their credit standards the net monthly increase in residential mortgages last month was just €26 million, compared to an average monthly increase of more than €700 million in recent months. The Central Bank said the figure was "exceptionally weak".

Mortgage lending is now growing at an annual rate of 7.6 per cent - the lowest rate of growth since 1986.

However, the market may be kept afloat if a cut in interest rates, forecast to take place next week, succeeds in stimulating demand for mortgages.

Economists predicted yesterday that the European Central Bank (ECB) would cut official interest rates by at least half a percentage point to 2.75 per cent when its governing council meets next Thursday.

IFG One Network, which represents a group of 175 mortgage brokers, said the scale of the downturn in the mortgage market was "very evident" in the Central Bank's data.

"The Minister for Finance would do well to view this data before he negotiates any deal with the banks," said Suzanne McGuinness, of IFG One Network.

"The British prime minister has been making commitments to kick-start the mortgage market in the UK in recent days.

"We need the same sort of commitments from the Government here," she said.

The Irish results of the euro-zone bank lending survey showed that credit standards on loans to households for buying houses tightened during the third quarter of 2008, the Central Bank noted.

Overall private-sector credit increased by €2.1 billion in October, but €1.6 billion of this increase was accounted for by lending to non-bank IFSC companies.

The year-on-year increase in private-sector credit continued to decline in October, falling to 9 per cent from 10.7 per cent in September.

Alan McQuaid, economist at Bloxham Stockbrokers, said the slowdown in credit growth was symptomatic of a consumer sector that has become increasingly cautious in recent months as the global credit crunch and deteriorating Irish economic outlook have increased fears of a sharp rise in unemployment.

"Against this background it is likely that consumers will remain very cautious in 2009, saving rather than spending or borrowing," Mr McQuaid said.

The ECB could cut base interest rates to 2 per cent or below next year, he added.

"This should be positive for lending growth, assuming the ECB cuts are passed on to consumers, but still not enough in our view to push credit growth higher again in the short term, given the deteriorating labour market outlook."

However, Davy Research banking analyst Scott Rankin warned that credit growth could turn negative next year.