It’s over a year now since the sub-prime mortgage crisis started to take effect on the international economy. As uncertainty began to spread with regard to returns on loans and mortgages, lenders were forced to tighten their lending criteria – which led to the current situation in which mortgages are in (relatively) short supply and house prices are falling rapidly.

It’s impossible to predict exactly when the mortgage market is likely to recover, but most economists agree on what will trigger a recovery.

What is happening now?

At present, the mortgage market is slow compared with previous years, although it is by no means stagnant. £5.5bn of mortgages were offered in November 2008 – suggesting that lenders are cautious, rather than ruling out mortgage lending altogether.

The main difference between now and the peak of the mortgage market in 2007 is lenders’ ability to offer mortgages. Not only are mortgage lenders more cautious than they used to be, but the funds required to provide mortgages have become more expensive.

The main indicator of this is LIBOR (London Inter-Bank Offered Rate). The LIBOR rate is a measure of the average rate at which banks lend to each other. In recent months, LIBOR has remained relatively high in relation to the Bank of England’s base rate, meaning that despite the Bank of England’s efforts to encourage higher levels of lending in the form of base rate cuts, the cost of lending has been slow to fall.

What could trigger a mortgage market recovery?

The Government have introduced measures to encourage higher levels of lending, most notably pumping billions of pounds into banks in order to improve their ability to lend. This in itself has not yet caused a measurable increase in lending, but it’s quite possible that it will aid banks as confidence increases amongst lenders.

The main factor affecting availability of mortgages is lending between banks. If lending becomes cheaper for the financial institutions themselves, lenders will be in a better position to offer mortgages and loans more freely.

However, it is unlikely that mortgage lending will return to anywhere near the levels seen at the peak of the market. Even when lending returns to normal levels, lenders are still likely to be careful with the credit history of borrowers, as well as deposits put down on new mortgages.