- UK Finance surprisingly reported that mortgage approvals for house purchases rose to a nine-month high of 39,980 in March from 39,207 in February. This took mortgage approvals to the top of the 38,000-40,000 range that has largely held since the beginning of 2018.
- The March data looks pretty resilient given recent heightened Brexit uncertainties. It may well be that housing market activity has gained some support from recent improved consumer purchasing power and robust employment growth.
- Nevertheless, conditions still look challenging for the housing market. Despite recently improved real earnings growth, house prices are still expensive relative to incomes, while the latest surveys point to consumer caution over making major purchases.
- It is possible that the avoidance of a “no deal” Brexit at the end of March could provide a modest boost to the housing market by easing some of the immediate uncertainty and concerns.
Consumer Credit growth at nine-month high in March
- UK Finance also reported that unsecured consumer credit growth rose to a nine-month high of 4.1% in March from 3.5% in February, which had been the lowest growth rate since November 2014. It has come down from a peak of 7.3% in October 2016.
- March’s pick-up in consumer credit growth ties in with strong retail sales over the month. It was also boosted by a very weak performance in March 2018 when consumer activity was constrained by the ‘Beast from the East’.
- At face value, March’s rise in the growth rate in unsecured consumer credit could be a sign that consumers may be starting to become more willing to borrow after an extended period of relative caution. However, we have our doubts this is the case – especially as economic uncertainties look set to be prolonged by the Brexit extension.
- While consumers have clearly been less affected by Brexit uncertainties than businesses, the overall impression remains that they have become relatively careful in their borrowing amid concerns over the economic outlook while the very low household savings ratio discourages further dissaving.
- Meanwhile, lenders have become more careful about advancing unsecured credit – the first quarter of 2019 saw lenders further reduce the amount of unsecured credit available to households and again tighten lending standards.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“UK Finance reported that mortgage approvals for house purchases somewhat surprisingly edged up to a nine-month high of 39,980 in March after dipping to 39,207 in February and 39,842 in January. Mortgage approvals were relatively stable over the first quarter.;
“March’s rise in mortgage approvals to 39,980 took them to the top of the 38,000-40,000 range that has largely held since the start of 2018. However, they are still 21.4% below the long-run (1997-2019) average rate of 50,891.;
“The mortgage approvals data looks pretty resilient given recent heightened Brexit uncertainties. It may well be that housing market activity has gained some support from improved consumer purchasing power and robust employment growth.;
“The housing market has been constrained for an extended period by overall challenging conditions – relatively limited consumer purchasing power (despite recent improvement) after an extended squeeze and fragile consumer confidence. It should be noted that the overall national picture has been dragged down by the particularly poor performance in London and parts of the South East.;
“While consumer purchasing power has been improving since mid-2018, it is still relatively limited compared to long-term norms after consumers faced a prolonged serious squeeze on purchasing power. Consequently, house prices are currently stretched relative to earnings. According to the Halifax, the house price to earnings ratio was still as high as 5.60 in March after spiking to 5.71 in February (the highest level since November 2017) from 5.40 in January.This is well above the long-term (1983-2019) average of 4.27.;
Consumer credit growth spikes to nine-month high in March from February’s lowest level since November 2014
“UK Finance reported that consumer credit growth rose appreciably in March to reach a nine-month high, after being at the lowest level since November 2014 in February.
“While the rise in the annual consumer credit growth rate was boosted by a very weak performance in March 2018, when consumer activity was chilled by the Beast from the East, it also ties in with strong retail sales growth over the month.
“Specifically, consumer credit growth rose to 4.1% in March after dipping to 3.5% in February (the lowest since November 2014) from 3.6% in January, 3.8% in December 2018 and a peak of 7.3% in October 2016.
“Annual growth in credit card borrowing rose to 4.3% in March from 3.7% in February. Seasonally-adjusted net credit card borrowing amounted to £202m in March. This was down from £228m in February but compared with a small net repayment of £6m in March 2018.”
Consumers and lenders have become more cautious over unsecured credit
“At face value, March’s marked rise in the growth rate in unsecured consumer credit could be a sign that consumers may be starting to become more willing to borrow after an extended period of relative caution. However, it needs to be kept in mind that March’s growth rate comes against a weak base due to consumer activity being hit by severe weather conditions in March 2018. And while retail sales were strong in March, there could have been an element of consumers stockpiling and bringing some forward purchases amid wariness over the impact that a disruptive Brexit at the end of the month could have on some supplies and future prices.
“So, it remains to be seen whether March marks the start of a greater consumer willingness to borrow and we have our doubts that will be the case – especially as economic uncertainties are being prolonged by the Brexit extension. Meanwhile, lenders have certainly become warier about advancing unsecured credit.
“Consumers have clearly been less affected by Brexit concerns than businesses, but the overall impression has been that they have become relatively careful in their borrowing amid concerns over the economic outlook while the very low household savings ratio discourages further dissaving. This may well be reinforced by expectations of further interest rate increases over the coming months, albeit gradual and limited. The April IHS Markit Household Finance survey showed that 65.8% of households expect the Bank of England to raise interest rates within the next year, only slightly down from 66.7% in the March survey.
“While the latest data shows the household savings ratio rose to 4.5% in the fourth quarter of 2018 from 4.1%% in the third quarter, it is still at a historically very low level. It crept up to average 4.2% over 2018, having fallen as low as 3.9% in 2017 from 6.6% in 2016 and 9.4% in 2016. It is also notable that GfK reported that consumer confidence in March was only marginally above the five-and-a-half year low seen around the turn of the year.
“Significantly, lenders have been reining in the amount of unsecured credit available to consumers and tightening their lending standards. Indeed, the latest Bank of England’s credit condition survey indicated that lenders reduced the amount of unsecured credit available to consumers in the first quarter of 2019 for a ninth successive quarter, and they expected to reduce it further in the second quarter.
“Additionally, lenders were reported to have modestly further tightened their lending standards for granting unsecured consumer loan applications in the first quarter of 2019. This was a 10th successive quarter of tightening standards. A further tightening of lending standards is anticipated over the second quarter of 2019.
“Recently improved real earnings growth will hopefully dilute the need for consumers to borrow – especially if this continues. Latest ONS data show that real earnings growth improved to 1.6% in the three months to February from 0.1% in mid-2018. This was the best level since mid-2016 although it was still relatively limited compared to long-term norms.”
Source: By Chris French