Lending to consumers is set to contract by 13.5% in 2008. Lending markets are currently beset by high market uncertainties, with the ongoing credit crunch, falling house prices, rising arrears and repossessions, and indebted consumers struggling to find credit. In current uncertain market conditions, it is neither good to be a lender nor a borrower.

After stagnating in 2005, the UK mortgage market increased by a staggering 26.1% to reach a new peak of GBP363.8 billion in new business in 2007. However, 2008 saw the credit crunch taking its toll on the market. At the end of June 2008, gross lending amounted to just GBP149.5 billion for the first six months of the year, a reduction of 18.9% over the GBP177.8 billion realized in H1 2007.

As the credit crunch shows no signs of abating, lenders are taking a precautionary approach to lending, which is causing the mortgage sector to deliver a weak performance over 2008-09. Datamonitor predicts that this sector will reach a relatively low GBP293.6 billion in gross lending in 2008 (-19.3%) and will contract by a further 3% in 2009.

The consumer credit market will fare better than the mortgage market, despite also contracting in 2008. The mature consumer credit sector will continue to see lenders tightening their lending criteria, seeking good quality customers and focusing on their own customer base. Datamonitor estimates that this market will contract by 3.2% to GBP199 billion in 2008 and will pick up slightly by 1.4% in 2009, driven mainly by spending on cards, personal loans and overdrafts, to account for GBP201.8 billion. On the whole, total new consumer lending, including both mortgages and consumer credit, will contract by 13.5% in 2008, amounting to GBP492.5 billion, compared to the GBP569.3 billion in 2007.

The credit crunch spells a new phase for lending markets, with fewer operating lenders, a shrinking number of products, higher prices, and more customers being refused credit. While the current market turbulence is proving difficult for both lenders and consumers, it has, nonetheless, provided lenders with the opportunity to reprice their products higher and reap higher margins.

On the other hand, consumers continue to be saddled with high levels of personal debt, facing rising household bills, with many falling behind on repayments and struggling to find further credit. With house prices expected to fall by at least 10% in 2008, rising arrears and repossessions, and inflation, the future of UK lending markets looks bleak.

Related research: Impact of the Credit Crunch on UK Mortgage Product Structures