Source: Cebr - Centre for Economics and Business
Research
UK consumers borrowed an additional £1.7 billion on net in June,
after £1.1 billion in May, according to figures from the Bank of
England’s Money and Credit bulletin this morning. This was
above the monthly
average for 2022 of £1.2 billion and marked the highest
level of borrowing since April 2018. June’s figure was split
between £0.6 billion of borrowing on credit cards and £1.0
billion of borrowing through other forms of consumer credit, such
as car dealership finance and personal loans. The annual
growth rate for all consumer credit remained constant in June
compared to May, at 7.6%.
Recent data showing high inflation carries important implications
for interest rates and borrowing activity. Inflation on
the Consumer Prices Index (CPI) measure was 7.9% in June, which
marked a significant deceleration on May’s rate of
8.7%. All else
equal, elevated inflation weakens consumer
spending power and today’s figures suggest that a portion of
consumers are turning to commercial credit to maintain their
living standards amidst a cost-of-living crisis. However, it is
likely this borrowing would be even higher if not for the recent
rises in interest rates over the past year, which have made
credit more expensive. The Bank of England (BoE)
increased rates by 50 basis points in June, to 5.0%, meaning the
base rate is now at its highest level since October
2008. Higher rates apply downward pressure on
consumer borrowing activity and encourage saving.
This morning’s Money and Credit bulletin also provided data on
the UK housing market. The number of mortgage
approvals for home purchases increased to 54,700 in June, up from
51,100 in May. This was the highest level since October
2022, showing some resilience in housing market activity in spite
of the downward pressure applied by higher interest rates.
Meanwhile, net mortgage borrowing totalled £0.1 billion in June,
after £0.1 billion of net repayments in May.
Although today’s figures show some resilience in housing market
activity, with approvals up to their highest level in eight
months, this improvement stems from a low base and the latest
data remains notably below 2022’s average of
62,700. Indeed, the
most recent HM Land Registry data showed
house prices grew by 1.9% on an annual basis in May, which marked
the seventh consecutive month of slowdown since the 10.9% growth
seen in October 2022. The recent rises in mortgage rates to
levels seen following October’s mini-budget mean the housing
market is likely to suffer during the second half of this
year. All else equal, higher rates increase the
cost of mortgages when fixed-term deals expire, leading to
affordability concerns for households and potential new buyers.
This reduces the demand for home purchases, in turn applying
downward pressure to prices. After two strong years
of growth, Cebr expects a 1.8% contraction in average house
prices in 2023. For 2024, we expect a relatively modest fall of
0.8% in average prices, in part due to the lag associated with
higher rates impacting the millions of households on fixed rate
deals.
