Consumers borrowing less

The numbers of mortgage approvals are still falling.  Consumer credit dropped to its lowest in ten years.  This confirms what analysts have been telling us for months, that the Bank of England’s higher interest rates will cool down the housing market.

There were 107 000 new mortgages in April, down from 112 000 in March. The Bank of England said that this is the lowest in the last year.  However, mortgages were not the only lending trend that decreased in the last couple of months.  Credit card, personal loan, and overdraft borrowing dropped to ₤498 million since March 1997.

This is not likely to halt the steady increase in the Bank of England’s interest base rate.  The increase to 5.7% appears to be written in stone. An interest rate hike this month will be no surprise. Another quarter point interest rate increase is expected in August, or September.

"Mortgage approvals are coming down,” said Jonathan Said, an economist at the Centre for Economics and Business Research in London. `"rate increases are starting to take effect.”

The expected rate on the September interest-rate futures contract was 6.05 percent at 8:44 a.m. in London today.  This means that investors are buying futures based on a 6.05% interest rate.  This is a solid indicator for the rest of us that our interest rates will be based on a minimum of 6.05% in September, and a possible 6.5%.

It is easy to estimate what your interest rate will be.  Consumers who have a good credit rating pay about 15 base points more than the Bank of England’s benchmark.  This rate increases with high-risk mortgages and loans.  The only thing that will increase the rates will be a drop in bank profits. 

If the bank profits drop, they may increase interest prices and fees in an attempt to keep their board members and stockholders happy.

Is the housing market really slowing?  It is hard to say. Foreign investors and the buy-to-let markets are still buoying the housing market.  Lending dropping may not indicate that the housing market has slowed in the UK, as much as it indicates that the buy-to-let investors have slowed their aggressive portfolio building campaigns.

Buy-to-let investors often mortgage up to 110% of a home’s value.  A slow in the buy-to-let market will have a dramatic impact on the lending numbers in the UK.

Hometrack Ltd. said that house price increases are at a four months slow. The only reason why the housing market has not slowed right down, or crashed, is because there is more demand than supply.

London, where the demand is highest, is now seeing an average house price of ₤350,000 – ₤400,000. This has moved the price far beyond what first-time home buyers can afford, which some analysts are also blaming for the decreased lending totals.

Why should UK adults worry that the lending is down?  At first glance, lower lending means that the debt mountain is decreasing, and that is a good thing.  Unfortunately, it also means that banks will be scrambling to meet their profit projections. 

There are several ways that a bank can do this. The most common is to increase fees like admin fees, closing fees, and interest rates.  There are also secondary ways to increase profits.  One new tactic the banks introduced recently was the ₤35 fee for ‘not’ using a credit card for 90 days. 

This type of new fee will become more common over the next few months as consumer spending growth weakens and the cost of borrowing increases. 

One thing that most analysts are worried about is that the UK consumer is falling out of love with their ‘debt culture.’ Retail sales declined for the first time in three months in April. This is alarming news for economic analysts.  The only thing that can topple the entire UK economy and cause a housing market crash is if the UK falls out of love with borrowing.

There have been some subtle indications that this may be happening, for the first time in more than 15 years.  One strong indicator is the number of consumers saving money, and paying down their debts is increasing.  While the increase is just a ripple on the surface, the media and social conscious, can change the economic climate of a country in a matter of months.

While most households now are two income households, there is a mild indication that UK consumers are not happy with this trend.  The school system will need to change as millions of mothers are no longer able to care for children through school breaks.  There is strong opposition to this. Whether it is strong enough to change the economy is left to be seen.

New reports suggest that consumers are becoming more reluctant to increase their record levels of borrowing, now at 1.3 trillion pounds. Net consumer credit fell to the lowest levels since August 2000, a signal that the climate may be changing.