Mortgages surge but Mark Carney says he will stop new bubble

Banks and building societies will grant almost 700,000 mortgages this year amid the biggest surge in lending since 2009, leading economic forecasters said yesterday.

The EY ITEM Club's prediction of a 12 per cent rise in home loans during 2013 came as Bank of England figures showed mortgage approvals breaking the 60,000 barrier to reach 60,624 in July – shattering City expectations and the best since March 2008.

EY's full-year forecast of 687,000 mortgage loans granted this year would represent the biggest annual rise since 2009, when lending rose 13 per cent from the trough of 522,000 during the worst of the financial crisis. This was less than half the pre-boom peak of 1.25 million home loans in 2007.

The surge in mortgage lending comes against a backdrop of rising confidence, with sentiment at its best since December 2009 according to research firm GfK. The Bank's Funding for Lending scheme (FLS) and the Treasury's Help to Buy initiative slashed the average interest rate on a new mortgage to a record low of 3.17 per cent in July, sending first-time buyers and buy-to-let investors piling back into the housing market. Bank Governor Mark Carney said yesterday he would "personally intervene" to prevent a new bubble. The Royal Institution of Chartered Surveyors recently signalled house prices rising at their fastest pace since 2006.

Nida Ali, economic adviser to the EY ITEM Club, said: "We are hopeful that signs of increased activity will encourage more house building. The sharp decline in residential investment has been a sizeable drag on the economy in the past few years but, if this reverses, it has the potential to provide some solid support to the recovery."

But Chitraj Channa, an economist with the Centre for Economics and Business Research, added: "The Bank of England will have to keep a close eye on the growing credit supply to ensure that we do not recreate the very conditions that caused the financial crisis in the first place."

Richard Sexton, of chartered surveyors e.surv, warned: "Help to Buy and Funding for Lending have given the market a shot of adrenalin, which has disguised underlying problems like a chronic lack of house building, but they can't continue indefinitely."

Lending to businesses rose £500m over the month – the first increase since January – but this was overshadowed by a £900m fall in loans and overdrafts to small and medium-sized firms, defined by the Bank as having a turnover of less than £25m. However, the figures also showed the average cost of loans for businesses rising sharply to 2.71 per cent in July, with prices pushed up by rising financial market yields. Banks have to hold more capital against business loans, meaning the recovery in corporate credit has been more sluggish.

In April the Bank redesigned the FLS scheme to incentivise banks to boost credit, allowing them to draw down £10 in cheap funding for every £1 loaned to SMEs.

Barclays economist Simon Hayes said: "It is difficult to discern yet any effect from the heavy bias under the redesigned scheme towards corporate lending."

Optimism on the rise in eurozone

Unemployment in the eurozone remained at a record high last month, according to official figures, but optimism in the region is on the rise. The European Union's statistics body, Eurostat, announced unemployment in July stood at 12.1 per cent, unchanged from June. However, a poll of business managers by the European Commission showed confidence up for the fourth straight month. Optimism was particularly strong in Germany and the Netherlands, but confidence in France, Spain and Italy is also on the rise.

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