The Bank of England will be worried by the mortgage and consumer credit data

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by Shaun Richards

We arrive at the latest money supply, mortgage and unsecured credit numbers just as we get a reminder of ch-ch-changes in a major area. This is a shift within the demand for cars that has boosted the used car industry. From the Financial Times

The typical asking price for used automobiles has shot up 15.2 per cent yr on yr, leading to a sudden rise worth for many autos, based on Auto Dealer, an automotive promoting enterprise.

Whereas new cars are in decline.

The Society of Motor Manufacturers and Traders, the UK automotive commerce group, has slashed its forecast for brand spanking new registrations in 2021 from 2.4m to 1.8m due to the restricted production of latest autos. This week, the body reported the worst July for UK automotive manufacturing since 1956.

So there has been a switch in the market driven by the lack of new cars.

Catherine Faiers, chief working officer at Auto Dealer, estimates that as much as 200,000 customers that will have purchased new automobiles will purchase used automobiles this yr. “Individuals are shopping  the place there’s availability,” she stated.

The reason I pick this out is that there is a strong link between the car market and credit these days as the UK Finance & Leasing Association points out.

The FLA is the leading trade association for the motor finance sector in the UK. In 2020, members provided £39 billion of new finance to help households and businesses purchase cars. Over 93% of all private new car registrations in the UK were financed by FLA members.

I make the point because whilst there is plainly a boom for credit for used cars as even the new higher prices are lower than a new car there is presumably a credit contraction here in overall terms. As it happens we get some ( rare) information in this month’s release but we are left wanting more.

Mortgage Mayhem

I use that paragraph heading in both senses of mayhem as you will see from the release.

Individuals repaid £1.4 billion of mortgage debt, on net, in July . Net repayments are relatively rare, with only one other repayment (in April 2020) in the past decade. The net repayment in July followed record borrowing in June (£17.7 billion), which was probably boosted by the initial tapering off of the stamp duty holiday.

So we have seen record borrowing and thus a rather literal mayhem followed by a type of Grand Old Duke of York strategy as the numbers not only fell but saw a rare net repayment. What the release does not say is that via the commencement of the Funding for Lending Scheme in the summer of 2012 it has been a tenet of Bank of England policy to act to keep net mortgage lending positive. For now researchers at the Bank of England will produce numbers showing an average of over £8 billion in net terms for June and July but the underlying worry will be about more net repayments.

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There was also a signal that the Bank of England has been doing its best to keep the party going.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages decreased 12 basis points to 1.83% in July.

We had noted the fall in some fixed-rate mortgages to below 1% which were record lows in themselves and it looks as though banks and mortgage lenders were competing hard for business pretty much across the board. For them the gross lending figures are key in terms of targets.

 Gross lending fell to its lowest since June 2020, at £16.5 billion. Gross repayments were a little below the twelve month average, at £18.1 billion.

The repayments numbers are always interesting as we have a bit of a dichotomy as we have a savings impulse at the same time as all the borrowing. Two groups of people heading in opposite directions if we look at the overall moves as opposed to just July.

We can look ahead to some extent from these.

Approvals for house purchases, an indicator of future borrowing, decreased further in July to 75,200. This is the lowest since July 2020, but remains above pre-February 2020 levels

BuiltPlace has crunched the numbers and noted that whilst there is a 6.4% monthly fall it is still some 13% higher than the average if we look at 2014-19. Here we see the collision between two official moves as the Bank of England effort is torpedoed by the ending of the Stamp Duty Cut.

Also of note is the impact of the lower mortgage rates.

Approvals for remortgage (which only capture remortgaging with a different lender) rose to 37,400 in July, from 35,800 in June. This remains low compared to the months running up to February 2020.

The issue here is that those who can remortgage probably have already done so and as more fixed rate mortgages are in play changes will be slower in future.

Consumer Credit

The researcher given the job of presenting the morning meeting in front of Governor Bailey will be thinking it is just not their day as they add this to the mortgage data above.

Overall, individuals borrowed no additional consumer credit in July. Within this, they borrowed an additional £0.1 billion of ‘other’ forms of consumer credit (such as car dealership finance and personal loans), offset by net credit card repayments of £0.1 billion (Chart 2). On average, £1.2 billion of consumer credit was borrowed, per month, in the 2 years to February 2020.

One can almost hear the Governor saying “none?” as he frowns. I think that the ch-ch-changes in the car market have been a depressing influence as relatively cheaper old cars replace new ones and less credit (leasing) is incepted. Meanwhile our poor researcher must be thinking that the final nail is being put into their career as they point out this.

The annual growth rate for all consumer credit remained weak, decreasing slightly to -2.7% in July from -2.2% in June. The annual growth rates of credit cards and other forms of consumer credit also remained weak at -8.3% and -0.3%, respectively.

Saving

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By contrast this remains in something of a boom at the household level.

Households deposited an additional £7.1 billion with banks and building societies in July. This compares to an average net flow into banks and building societies of £8.8 billion between April and June 2021 (Chart 3), and a series peak of £27.4 billion in May 2020. The July flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion.

The impact of this is being felt in the consumer credit numbers I think as some will be spent but it is hard to quantify.

Comment

These numbers are on a single month basis quite an issue for the Bank of England. It has had net monthly mortgage growth as an agent of explicit policy for nearly a decade now. Plus consumer credit growth went hand in hand with it. It is a case of bad timing because with the increasing number of signals that the Chinese economy is slowing then we see concern for the UK at the end of the year as well. That will be happening as another concern of ours – the end of the furlough schemes- take place.

It will not be keen on the persistence of household saving either and will be mulling numbers like these from Samuel Tombs.

Households continued to accumulate cash in July at a faster rate than before Covid-19, taking their “excess savings” to £176B, or 8.3% of 2020 GDP. The economy now has been fully open for 3m and most people have been vaxxed recently. If not now, will this cash ever be spent?

My own view is that some of what is counted as “excess savings” may well be a reflection of the ZIRP or 0% era ( strictly a Bank Rate of 0.1%). After all longer-term saving and pensions hardly look attractive at these levels especially with so many stock markets at all-time highs.

Another problem is that money supply growth is slowing it is still 7.9% on the broad measure ( M4). If we are expecting a slowing of growth that means a greater inflationary impulse. Last month’s fall in the targeted inflation measure to an annual rate of 2% looks ever more a statistical rather than a real move and therefore misleading.

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