Collapse in Home Loans Could Trigger Consumer Slowdown ; BUSINESS ANALYSIS Mortgage Approvals at Nine-Year Low, Equity Withdrawal Slows for Third Quarter in a Row
Philip Thornton Economics Correspondent, The Independent (London, England)
MORTGAGE LENDING for both house purchases and equity withdrawal has slowed dramatically, according to figures released yesterday by the Bank of England.
The number of mortgage approvals for house purchases fell for the sixth month in a row to hit a nine-year low of 77,000 in November, the Bank said. The volume of the loans fell to pounds 6.46bn, the lowest since June 2002.
And the Bank said mortgage equity withdrawal - loans on a property for reasons other than house purchase - slowed for the third quarter in a row.
Homeowners released pounds 13.4bn from their homes over the three months to September, down from the peak of pounds 16.6bn in the summer of the previous year.
Coming alongside early indications of poor Christmas trading on the high street, these latest signs of rapid cooling in the property market will provide an early test of the Bank's controversial forecast that a fall in house prices would not trigger a collapse in consumer spending.
In its November inflation report, the Bank published research showing the link between the two variables had broken down. A few days later, the International Monetary Fund warned that a house price crash could have a "significant" effect on consumption.
Analysts say it is too soon to say who was right. But as Stephen King, the managing director of economics at HSBC and a columnist for The Independent, puts it: "Perhaps 2005 may finally be the year when we discover the true relationship between house prices and consumer spending."
Referring to the decline in mortgage approvals, Simon Rubinsohn, the chief economist at Gerrard fund managers, said: "The drop over the past 12 months has been stunning - 43 per cent year on year. That even exceeds the collapse in activity seen at the tail end of the 1980s."
The Bank of England figures also indicated that consumers exercised restraint before Christmas, with borrowing on credit cards and other unsecured loans weakening in November. Consumer credit increased by pounds 1.4bn, pounds 100m less than the previous month.
At the same time Woolworths reported a "disappointing" December trading session. More significantly, sales at its out-of-town Big W stores, which focus on so-called big-ticket items, dropped 8 per cent, while its MVC music and video stores fell almost 5 per cent. Toys, games consoles and DVDs also slipped.
In other words, there is a hint that shoppers were less willing to spend their money on discretionary items, at least in Woolworths.
Trevor Bish-Jones, its chief executive, said: "There have been four interest rate rises, utility bills and fuel prices have gone up - people can only spend a one pound note once. If people's mortgage payments are going up, their disposable monthly income must by definition be going down."
In the run-up to Christmas several retail chiefs made warning noises about the impact the turnaround in sentiment in the housing market would have on their sales.
John Clare, the chief executive of Dixons, blamed the softer housing market for the "dent" to consumer confidence and warned big- ticket products will be hit more than low-ticket ones.
Dixons is among nine blue-chip retailers preparing to issue their festive trading statements in the coming days, alongside Next, Marks & Spencer and Matalan.
Evidence from analysts who measure footfall through major shopping centres indicates the number of visitors in December was down on 2003 - although there had been a post-Christmas pick-up.
The research carried out by the Bank, which is forecasting "modest" house price falls, showed the correlation between house price inflation and consumption growth had broken down since 2001. …