The global credit storm has added Bear Stearns, among Wall Street’s finest, to its list of victims, and one thing has become clear: hopes that the panic would subside in time for spring, when there is normally a flowering of housing demand, have faded. There is a long way yet to go. Tucked away in the Treasury’s budget documents was a prediction that conditions in financial markets would not return to normal until mid-2009. Some think it will be even longer.

What does this mean for the housing market? A few days ago, I spent some time with members of the Home Builders’ Federation. The view from builders up and down the country was that, judging by site visits at least, interest from buyers remains healthy. Converting those visits into sales, however, has become much harder, and lack of finance is increasingly the explanation. Lenders are either turning down applicants or applying much more cautious valuations to properties.

As I have noted here, the practical impact of the credit crisis is that mortgages are harder to come by and more expensive. First-time buyers without hefty deposits can’t get a loan. Anybody with a dodgy credit history is finding it harder to remortgage on reasonable terms or to trade up. At a time when confidence is low, it does not take much to deter potential buyers. As Ray Boulger, of John Charcol, points out, it takes only one weak link in a housing chain of four or five transactions for the whole thing to fall down.

The Council of Mortgage Lenders, in its latest newsletter, sums up the position for lenders seeking funding in the wholesale markets. “There have been no new mortgage-backed securities issues in the UK since last August, and only a single publicly sold deal from any European market,” it notes. “There were two public UK covered-bond issues in the autumn – from Nationwide and HBOS – but there has been nothing since... For most lenders, capital markets are effectively shut across the board.”

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This does not mean that lenders have no money. They have inflows from savers – the traditional source of mortgage finance. They are also getting funding direct from the wholesale markets in the form of deposits, rather than through mortgage-backed securities. Yet even lenders who have the cash are more reluctant to hand it out. The squeeze remains quite intense. Products are being withdrawn at short notice and borrowers, even when accepted, are sometimes having to queue.

This is, in some ways, a return to the past. Mortgage rationing used to be the norm in Britain. In the Life on Mars era, prospective borrowers had to prove their suitability by demonstrating that they could save on a consistent basis for a couple of years. The idea of fixing up a mortgage in a few minutes on the phone would have been regarded as ridiculously avant-garde. We are not returning to those extremes of rationing, but the days of easy mortgages are clearly over. This will be a good thing in the long term, though adjusting to the new reality is proving more than a little painful.

home.economics@sunday-times.co.uk

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