Svenja O’Donnell London

UK mortgage approvals fell in May and construction shrank at the fastest rate in two-and-a-half years in June, adding to signs the housing market is slowing amid growing concern over the economic outlook.

Lenders granted 51 098 loans to buy homes compared with 51 627 the previous month, the Bank of England said yesterday. A gauge of building output based on a survey fell to 48.2 points from 54.4 in May, a separate report by Markit and the Chartered Institute of Purchasing and Supply showed.

The figures add to the case for central bank policymakers to increase stimulus when they meet this week. An index on Monday showed factory output shrank for a second month in June, suggesting the economy remains mired in a recession.

Demand for homes has fallen as Europe’s debt turmoil casts a shadow over Britain’s economic prospects and banks curb credit, with Nationwide Building Society reporting last week that house prices fell 0.6 percent between May and June.

“Household lending has been depressed for quite a long time and there’s no evidence of improvement on the corporate side,” BNP Paribas economist David Tinsley said. Economic growth in the second quarter “could well be negative. It would be very strange if the Bank of England did nothing this week.”

A survey of 16 economists predicted that mortgage approvals would drop to 50 000. Approvals are still running at half the monthly average seen in the decade to 2007.

The Bank of England and the Treasury will announce within weeks details of a new programme to get the flow of credit moving again. A central bank survey taken in May showed households and companies would face significantly tighter borrowing terms in the third quarter as lenders pass on higher funding costs.

Net mortgage lending was £563 million (R7 billion), down from £1.05bn in April and the lowest since September last year. Net consumer credit rose to £732m from £379m in April. Net borrowing on credit cards rose by just £70m.

Economists forecast the Bank of England would raise its target for asset purchases by £50bn to £375b, but would leave the benchmark rate at a record low of 0.5 percent. The bank will announce the decision at noon in London tomorrow. – Bloomberg