UK consumer lending starts to rise

UK households have started borrowing again, with a small increase in home lending giving a glimmer of hope to economic recovery.

The Bank of England reported that total net lending to individuals rose by £0.7 billion in August although year-on-year it was down by 0.1 percentage points to 0.8 per cent.

The financial regulator, the Financial Services Authority, reported a slight increase in home lending activity in the second quarter of 2009.  The FSA said new advances rose 3 per cent in the quarter and the stronger improvement in new commitments, “suggests the market has stopped falling and may now be picking up, helped by lower interest rates and improved confidence amongst borrowers.”

The Authority collects the data from 300 mortgage lenders and said that the number of new arrears cases fell for a second quarter, helped by lower interest rates.  The increase in overall arrears rose marginally as borrowers on 403,000 loans were still struggling to clear arrears.

The Bank of England found that consumer borrowing rose for the month after falling in July.  Borrowing for housing remained steady but the rate of growth in consumer credit excluding housing fell to 0.7 per cent year-on-year.

The Council of Mortgage Lenders, whose members have issued 98 per cent of the UK’s 11 million mortgage loans, said the figures showed that housing market activity had flattened but remained stable and well above its lows of a year ago. “The weak economy and limited capacity to lend is continuing to restrict further improvement and we expect lending to remain subdued,” said CML economist Paul Samter.

UK house prices peaked in 2007 and have since fallen by about 20 per cent until stabilising.  But a study by economic forecaster Ernst and Young ITEM Club this month said it would take five years for prices to recover to the peak and described the current stability as a “false dawn.”

Senior economic adviser to the forecaster, Hetal Mehta, said price rises largely reflected the acute shortage of available properties because homeowners were trapped in negative equity or reluctant to sell and lock in losses.

“Mortgage lending remains depressed and with 56 per cent of owner occupiers having a mortgage, it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending,” she said.  “However, this would still appear to be some way off. Banks are continuing to restrict the amount of money that they are willing to lend, with them looking to strengthen, rather than expand, their balance sheets.”

She said the UK had one of the highest rates of home ownership in the world so the housing market had always been central to the prospects for the domestic economy.

Sources:

www.bankofengland.co.uk
www.cml.org.uk
www.ey.com/UK/en/Home
www.fsa.gov.uk