The housing market looks set for a summer boom after new figures showed yesterday that homebuyers borrowed a record amount in May. This flurry of borrowing quashed any last hopes of a cut in interest rates next week, with all eyes on a hike in mortgage costs before the end of the year.
The figures were issued a day after the Bank of England warned that the mounting debt burden would put households at risk if the economy turned or rates rose. Mortgage lending rose £4.2bn in May, the largest single increase since records began in 1993, the Bank said. Total lending hit a high of £5.6bn.
There were 107,000 mortgage approvals, the highest for four years. This was seen as a good predictor of housing market activity. One City analyst, John Butler at HSBC, said he expected house price inflation to hit 10 per cent in the next few months.
Danny Gabay, of JP Morgan, agreed, saying: "House prices are heading for double-digit growth in the summer. If you look back to 1999, what turned the Bank of England from cutting rates to raising them was the housing market." But households could now be vulnerable to a sudden rise in borrowing costs.
Ciaran Barr, chief UK economist at Deutsche Bank, said: "What concerns the MPC is that a decision to tighten policy could yet result in the debt position becoming unsustainable. It remains to be seen whether it will all end in tears."
The ratio of unsecured debt bank and credit card loans to income has jumped from 12 to 20 per cent in six years. Households have run a financial deficit since the end of 1998, and homebuyers are borrowing a record multiple of their incomes.
In its Financial Stability Review on Thursday, the Bank said: "Rapid growth in borrowing has somewhat increased the sector's vulner- ability to an economic downturn ... or an increase in rates. Households might find they had taken on more mortgage debt than prudent."
The City now awaits estimates from Nationwide and Halifax of house prices, for June on Tuesday and the second quarter on Wednesday. These figures are expected to show strong growth and will be just in time for the meeting of the Monetary Policy Committee on Wednesday and Thursday.
A poll of 30 City economists found that 29 expect the MPC to leave rates at 5.25 per cent. But financial markets scent a rise, pricing in a quarter-point increase before summer's end.
As the world's largest economies slow in the US and Europe, the MPC is trying to avert a recession without fuelling an inflationary domestic boom. Recent figures show that recession is a long way away. Economic growth in the first quarter has been revised up to 0.5 from 0.3 per cent.
A survey from the European Commission showed yesterday that optimism among UK consumers in June hit the highest level since the millennium. Households' optimism about their personal finances hit an all-time high, while unemployment fears fell sharply.
George Buckley at Deutsche Bank said this was surprising, given recent redundancies and a recruitment advertising fall. "The labour market is the one area we would be concerned about. If it starts to ease we could see a fall in consumer confidence and credit," he said.Reuse content