UK Mortgage Lending surges to a record high

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by Shaun Richards

Today brings us up to date with what is now a year of the Bank of England going what can be called all in on monetary policy. We have seen its Bank Rate cut to 0.1% and its QE bond purchases if we includes the corporate bonds, raised from £445 billion to £833 billion on its way to £895 billion later this year. There have been various loan support schemes as well with the CCFF where the Bank buys commercial paper at £7.2 billion. That includes 2 erstwhile members of the European Super League with Tottenham Hotspur at £175 million and Arsenal at £120 million, or if you prefer a North London thing.My alma mater the LSE is in there at £80 million too

There are three contexts we can look at to give us a perspective on this. Firstly the economy seems to be showing ever more signs of moving forwards. In this instance someone at BBC Business seems to have had a sweet tooth over the weekend.

‘People are literally running in to shop… We bagged up the pick n mix and it was sold out in under an hour’ Gordon Gibb, owner of Flamingoland in Yorkshire, told @seanfarrington his business got a boost over the early May bank holiday.

This backs up this from Ernst and Young.

A substantially stronger April CBI distributive trades survey shows consumers significantly stepping up their spending, both in the run-up to non-essential retailers re-opening on 12 April and in the immediate aftermath. The survey only captures three days of the re-opening of non-essential retailers (the survey covers 25 March – 15 April).

Also this morning’s Markit IHS release could hardly be more positive.

The manufacturing sector was flooded with optimism
in April as the PMI rose to its highest level since July 1994,
bolstered by strong levels of new orders and the end of
lockdown restrictions opened the gates to business. It was
primarily the home market that fuelled this upsurge in
activity though more work from the US, Europe and China
demonstrated there were also improvements in the global
economy

If we now shift to the international position there have been a couple of developments today. Here is David Sheppard of the Financial Times.

EU carbon price hits a record high above €50 a tonne, pushing the cost of polluting for industries covered by the EU Emissions Trading System to roughly double their pre-pandemic level Huge ramifications for power generation and manufacturing #EUETS

That looks another signal of inflation on its way which gives another context to easy monetary policy. Also plants may have another view on carbon dioxide being pollution. The inflation theme continued if we look again at the Markit survey of UK manufacturing.

The resulting input
shortages kept producer price inflation among the highest
over the past four years. Manufacturers have generally
passed on these costs to customers, as highlighted by a
survey-record rise in selling prices,

Then if we look at Denmark we see that contrary to the supposed trend we see that negative interest-rates are spreading. From the quarterly release from Jyske Bank.

Effective 11 June 2021, Jyske Bank changes the variable interest rate on corporate clients’ demand deposits to -0.95% p.a. from -0.75% p.a.

Mortgages

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It was only on Friday we looked at this from the Nationwide.

New record high average price of £238,831,
up £15,916 over the past 12 months.

Today we see one of the main drivers of it from the mortgage data and the emphasis is mine.

Mortgage borrowing was very strong in March with individuals borrowing an additional £11.8 billion secured on their homes (Chart 1). This was the strongest net borrowing on record since the series began in April 1993, with the previous peak in October 2006 (£10.4 billion). The strength in net lending reflected gross lending also reaching a new series high in March (£35.6 billion). The strong borrowing was driven by the expected ending of the temporary stamp duty tax relief at the end of March, which has now been extended to the end of June.

When you consider the booms we have seen that number is quite something. I note that it is backed up by a surge in gross lending as well. In terms of totals we passed the £1.5 trillion level in January and is now £1.516 trillion. Moving further up the mortgage chain seems to back that up.

The strength in mortgage borrowing follows a large number of approvals for house purchase. These approvals have fallen from a recent peak of 103,100 in November to 82,700 in March, but they remained relatively strong. In February 2020, there were 73,000 approvals for house purchase.

As to mortgage rates they will not make the Governor of the Bank of England Andrew Bailey quite so happy as he has gone to enormous effort to get them below pre pandemic levels.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 4 basis points to 1.95% in March. That is above the rate in January 2020 (1.85%), and compares to a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained broadly unchanged at a series low of 2.08%.

That is a reflection of the rising bond yields we have been seeing in recent months. I think there is more to come as my indicator for this which is the UK five-year bond yield is at 0.39% and has risen by quite a bit more than the 0.1% rise in mortgage rates since January. So we could easily see new mortgage rates not only go above 2% but reach the existing stock level at 2.08%.

Of course Governor Andrew Bailey has experience of things he has tried to cut rising for his days at the Financial Conduct Authority. There he tried to cut overdraft rates from around 19%. As they are now 33.5% you can see what a botched effort that was.

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Consumer Credit

This used to be called unsecured credit but that was replaced with the much more friendly sounding consumer credit. However the trend over the past year or so has been anything but friendly.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). A further net repayment of £0.5 billion in March this year was, however, a little smaller than seen on average each month over the past year (£1.9 billion). It was also a smaller net repayment than in March 2020 (£4.1 billion), so the annual growth rate – while remaining weak at -8.6% in March – rose from its series low of -10% in February.

In terms of detail we get very little as for example it has been quite some time since we got a steer as to what is happening with car finance. All we are told is that it is mostly a credit card game.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.4 billion) and other forms of consumer credit (£0.2 billion). The annual growth rates of both components have risen from series lows, but remained weak at -18.5% and -4.1%, respectively.

Comment

We see record house prices accompanied by record mortgage lending. If we jump back just over a year to when the Bank of England was making its decisions at the peak of the crisis in mid-March last year it would have been very pleased if it knew the future. But there are issues with this and let me give you something heading the other way. We do nit get told this in the release but of you look at the numbers repayments at £23.8 billion must have been a record too. So some are heading in the opposite direction to official policy.

That leads us to the issue of saving which we see has boomed as well during the pandemic. I wait to see how economics research covers this as we see exactly the opposite of what economics 101 has told us with lower interest-rates being associated with more not less saving. Some of it has been forced but far from all of it. That leads to another line of though as if the past of the UK is any guide we will see at least some of the saving head for the housing market as time passes.

The money supply numbers are now being influenced by the fact that policy was eased a year ago so annual growth fell by 3% to 12.3%. But the heat is still on as we note that monthly growth was 0.5%. Pre pandemic that would have been considered to be rather hot.

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