Crash worries grow over housing market

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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.

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