Alarm as mortgage lending soars

A FRESH surge in mortgage lending announced today is almost certain to provoke the Bank of England into raising interest rates next month, despite widespread evidence of a property sales slowdown.

The Council of Mortgage Lenders (CML) reported gross lending hit a record £27.8bn in June, up from £24.1bn in May and 24% higher than the £22.4bn lent in June 2003.

New homeloans also reached their highest ever monthly level at £13.6m – a leap of 13% from May and 40% higher than in June of last year.

David Page, economist at City stockbroker Investec, said: 'If there was any doubt remaining about an August rate hike, this pretty much dispels that'

This was underlined by the Building Societies Association's (BSA) latest figures, also published today, revealing homeloans issued by building societies hit £4,689m in June of this year, up from £3,943 in June 2003. The figures do not include societies that have converted into banks.

The British Bankers Association (BBA) also saw mortgage lending rise to £6.5bn in June, up from £5.1bn in May. It is also significantly higher than the recent monthly average of £5.7bn.

House purchases have fuelled the steady growth in the mortgage market, now accounting for half of overall lending. However, remortgaging levels increased by 16%, from £10.8bn in June from £9.3bn in May. It accounted for 39% of total lending.

In June, income multiples for the average first time buyer exceeded three times income, for the first time ever. Typically people moving and remortgaging borrowed 2.82 times their income.

Michael Coogan, director general of the CML said: 'The signals in the housing market are mixed at present. June saw a bounce back to record lending levels, with an especially strong resurgence in lending for house purchase.

'But however you look at it, in an environment of rising interest rates and rising house prices, there will come a point where affordability constraints mean that lending growth slows down.

'Early evidence from estate agency surveys suggests consumer appetite is already beginning to turn. But it may still be another few months before the lending surveys reflect this.'

Simon Rubinsohn, chief economist at stock broker Gerrard, said the jump in mortgage lending appeared to be at odds with a separate report published today by the Royal Institution of Chartered Surveyors, which represents many of the country's estate agents and which showed the housing market cooling rapidly.

However, he said the RICS survey was more forward-looking and more fully reflected the impact of the recent base rate increases and warnings from Bank of England Governor Mervyn King.

'Significantly, the number of mortgage approvals has fallen back since the tail end of last year and if the RICS survey is anything to go by, this trend will become more pronounced over the coming months,' he said.

'As a result, we would expect the mortgage lending numbers to gradually reflect this more subdued picture.

'That said, we still do not believe the conditions are in place for a sharp fall in house prices.'

The Bank of England's interest rate-setting monetary policy committee left rates at 4.5% earlier this month after the first back-to-back increases for more than four years in May and June.

The odds are now on a rise to 4.75% in the first week of August.

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