Lenders expect credit conditions to remain broadly steady in the first quarter of 2011 but are bracing for a further drop in mortgage demand and slightly higher losses from mortgage defaults, a survey by the Bank of England showed.
The central bank's quarterly credit conditions survey highlights the continued reluctance among banks to extend credit at a time of deep public spending cuts and possible further falls in house prices.
"Some lenders reported that availability had been dampened somewhat by expectations for house prices," the survey noted. "Lenders commented that the outlook for house price inflation and the housing market more generally had weakened in the fourth quarter of 2010."
On the positive side, lenders reported they had increased the availability of credit to small businesses over the past three months and expected a further increase in the first quarter of this year.
The government has been encouraging banks to lend more to small firms, many of whom have been badly hit by the recession and do not have access to the capital markets.
Lenders reported that the default rate on mortgages had remained broadly steady in the fourth quarter of 2010 but losses due to defaults rose for the first time since the second quarter of 2009 and were expected to rise further.
Default losses on corporate lending was expected to fall in the first quarter of 2010 for large and medium-size companies but to rise for small firms.