Overall personal sector borrowing remains buoyant, rising 0.6% on the month and 9.5% on the year, but this compares with 9.8% in each of the previous three months and before that continuous double-digit increases extending back to August 2001. Perhaps somewhat surprisingly, borrowing for mortgage purposes has held up even more, rising 0.6% on the month and 10.7% on the year. However, we are now beginning to see some pronounced changes in the indicators that lead mortgage borrowing. The most striking of these is the number of loans approved for house purchase, which fell from 100,000 in September to 88,000 in October (chart 1). That’s a fall of 12% on the month and a massive 31.3% on the year, leading one commentator to claim already that recession in the UK is now inevitable.
This is far too gloomy a view in our opinion. True, approvals could continue to decline from here, but they have some way to go before they are consistent with outright declines in economic activity. For one thing, the number of approvals is still significantly higher than it was in late 2004 (when a certain economics consultancy last warned, wrongly, that house prices were set to fall by 20% over the next two years), never mind the lows seen in the mid-1990s. What’s more because the 2004 declines were not sustained, they caused barely a blip on actual mortgage lending. Clearly, the situation needs to be monitored closely month-by-month, but our conclusion is that the data are merely consistent with a much needed period of consolidation in the housing market.
Potentially more worrying is the ongoing rise in the cost of servicing mortgage debt (chart 2). Although interest rates (even at the peak of this cycle) are much lower than they were in the late 1980s/early 1990’s, when Bank Rate hit 15% (and average variable mortgage rates were 17.5%), because the stock of mortgage debt has risen so rapidly in recent years (up some £49.4bn or some 121.3% since August 2003) the amount the personal sector has to allocate to servicing that debt has increased from around 5% of household disposable income (HDI) to 10.5%. Effectively, personal sector discretionary purchasing power has been reduced by the equivalent of 6.6% of HDI. And with record oil and petrol prices further squeezing the amount consumers have to spend on non-oil and non-housing goods and services, overall consumer demand looks set to slow markedly during the remainder of Q4 and throughout 2008. The Bank of England has lowered its growth forecast for next year to around 2.0%. This is too high in our view; we believe it will be nearer 1.5%, but at this stage we think it is a more likely outcome than recession. Nevertheless, these latest data on mortgage approvals could be the last piece of information the MPC needs to sanction a quarter-point rate cut early next month.