UK lenders approve fewest mortgages in nearly two years - BoE

By David Milliken and Peter Hobson

LONDON (Reuters) - British lenders approved the fewest mortgages in nearly two years last month as the housing market continued to slow after June's vote to leave the European Union, raising the chance of an outright fall in prices next year.

House purchases have been falling since the start of the year, buffeted by higher taxation on investment properties as well as the EU vote. Housing market slowdowns have typically heralded future weakness in broader British economic growth.

However, other figures on Thursday suggest that for now consumers are continuing to spend and to borrow heavily, placing the Bank of England in a quandary as it considers whether it will need to cut rates for a second time this year.

The number of mortgage approvals last month dropped to its lowest since November 2014 at 60,058 -- roughly in line with the decline forecast in a Reuters poll, monthly BoE data showed.

The central bank predicted last month that approvals in the second half of 2016 would average 56,000 a month although it recently said the slowdown could be less severe.

Some economists still expect 2017 will bring the first fall in prices since the depths of the financial crisis in 2009.

"Housing market activity is likely to be increasingly pressurised by appreciable uncertainty following the UK's vote to leave the EU," IHS Global Economics' Howard Archer said. He expects a 3 percent fall in house prices next year.

The regulatory backdrop is also becoming less favourable for some corners of the housing market.

Finance minister Philip Hammond said on Thursday he did not plan to extend his predecessor's scheme to indemnify high loan-to-value mortgages - which expires at the end of this year - though other subsidies for house purchase will continue.

The 'Help to Buy: Mortgage Guarantee Scheme' supported one-in-four high loan-to-value mortgages at the start of the year - down from 70 percent at its launch - and the BoE said on Monday that scrapping it would have little effect on lending.

Separately on Thursday, the BoE urged all lenders to factor in further tax rises which will hit small landlords next year when considering new loans.

For now, however, consumers appear untroubled by the Brexit vote. A monthly survey from the European Commission showed morale rebounded in September from lows seen in July and August to levels seen in the months running up to the referendum.

Consumer borrowing in August was 10.3 percent higher than a year earlier - along with June, the fastest growth since late 2005, the BoE said.

Capital Economics's Scott Bowman said low interest rates would stop borrowing from slowing much in coming quarters. "We think that the resilience of consumer spending will prevent the economy from falling into a full-blown recession," he said.

Most economists expect the BoE to follow up August's rate cut with a further reduction before the end of 2016, though stronger-than-expected data has made some policymakers hesitant.

(Editing by William Schomberg)