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Thursday, January 30, 2003

UK: The Housing Bubble Goes On And On - Till It Doesn't

UK house prices rose by 26.5 per cent in the year to January, the fastest growth rate in 13 years, and debt levels have hit a new record high, according to figures released by Nationwide, Britain's second-biggest mortgage lender. This increased level of personal indebtedness was also confirmed by figures from the Bank of England which show that personal borrowing grew by 9.4bn pounds (1.1 per cent) in December, 600m pounds more than the rise in November. This puts the annual rate of increase at 13.6 %, up just a touch from the 13.5% registered in November, the highest rate of increase since the Bank starting recording the data in April 1993. And just to pile it on a bit thicker the figures also show that consumer credit grew at a rate of 15.1% year on year. Clearly these numbers are not sustainable, and in one moment or another something is going to snap. The worry has to be that the debt deflationary backlash could be really important, and its not clear what either the Bank or the Treasury can do at this stage to avoid the crash, since pricking a bubble at the best of times is a tricky issue, and right now fears of provoking an even deeper recession cannot be taken lightly. All in all, it seems that last weeks unfortunate London tube train might not be the only thing to come flying off the rails.

Nationwide said there appeared to be little sign of a slowdown in mortgage lending. It lent a gross £216bn last year. The majority - £83bn - was in remortgaging, while £43bn was lent to first time buyers and £77bn to existing home owners. "With the current trend in growth very stable and strong we would expect the annual inflation rate to remain around 25 per cent for the next couple of months," said Alex Bannister, Nationwide group economist. Despite concerns about Britons' record levels of household debt, Mr Bannister said homeowners appeared to be more insulated from the effects of falling house prices than in the past, mainly because buyers were putting down larger deposits. In 1989 almost 300,000 - or nearly half of first time buyers - put down a deposit of 5 per cent or less. Nationwide estimate that only 125,000 put down a deposit of 5 per cent or less in 2002, increasing the number of people who had a buffer against falling house prices. The record level of borrowing last year was driven by equity withdrawal, as households took advantage of sharply rising house prices to increase borrowings against the value of their homes. The Bank has left interest rates at a 39-year low of 4 per cent for 14 consecutive months. Its monetary policy committee will meet next week and is widely expected to leave rates on hold again. Charles Bean, the Bank's chief economist, said on Wednesday night consumers were underpinning the economy. Growth at only slightly below trend had been achieved by boosting domestic demand - and especially consumer spending -to offset the external weakness, Prof Bean said in a speech to the London School of Economics.
Source: Financial Times

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