Housing price boom fuels £7bn consumer borrowing

Britons borrowed a record £7bn against the rising value of their homes in the final months of last year to fund spending sprees, the Bank of England said yesterday.

Mortgage equity withdrawal – home loans not used for a house purchase – jumped in the three months to December from just £3.4bn a year ago and £6.8bn in the previous quarter.

The figures, which were accompanied by signs of rising demand for labour, will feed calls for interest rates to rise sooner rather than later. The data follow news earlier in the week that house prices are rising strongly, and are the latest to highlight the dominant role housing plays in the economy.

Economists said the increase, which has been a trend for the last four years, was driven by rising property prices and a fall in mortgage rates to a 50-year low. Simon Rubinsohn, chief economist at City brokers Gerrard said: "As in the late 1980s, rising house prices have provided homeowners with the opportunity to extract capital."

The surge in borrowing will alarm the Bank of England in terms of monetary policy and financial stability.

Some members of the Monetary Policy Committee are concerned that once the global economic recovery moves into full swing, current levels of borrowing and spending will be incompatible with low inflation.

Inflation may already be starting to rise. The Economic Cycle Research Institute, a US body, yesterday said its inflation gauge ticked up for a second month in a row.

Meanwhile, other commentators are worried if rates rise sharply, consumers will find it hard to pay their debts and will reduce their spending in response. Mr Rubinsohn pointed out that as a percentage of disposable income, equity withdrawal represents 4 per cent compared with 8.5 per cent at the peak of the 1980's boom.

But Danny Gabay, at JP Morgan, said a key difference between now and the 1980s was that credit card spending was also running at record levels. Together the two elements took up 6 per cent of income.

"This, more than anything else, underlines the need for a restraining hand," he said.

The upbeat economic mood was reflected by a survey showing demand for new staff rose at its fastest rate for nearly a year.

The Recruitment and Employment Confederation said the number of people placed in permanent jobs by recruitment consultancies rose in March for the first time in 11 months.

"Overall, the figures confirm our belief that the consumer will not slow as aggressively as had been initially anticipated, being supported by both cheap borrowing and the tightness of the labour market," said George Buckley, a UK economist at Deutsche Bank.