October 29, 2013 / 9:43 AM / 6 years ago

Mortgage approvals hit 5-year high as borrowing costs fall

LONDON (Reuters) - British lenders approved the most mortgages in over five years last month as borrowing costs sank to their lowest in a decade, central bank data showed on Tuesday, setting the stage for further house price rises.

A residential street is seen in Notting Hill in central London October 8, 2013. REUTERS/Toby Melville

Business lending also picked up - though only for larger firms - but the figures did little to dispel some economists’ concerns that Britain’s economic recovery will remain heavily reliant on consumer demand for the immediate future.

Mortgage approvals for house purchases rose to almost 67,000 in September from just under 64,000 in August - its highest level since February 2008, though below a pre-crisis average of around 90,000 and in line with economists’ forecasts.

“A further pick-up in housing market activity is in the pipeline. But we think it unlikely that this will change the Bank of England’s view that this is anything other than a gradual recovery in house prices, at least for now,” said Jens Larsen, chief UK economist at Royal Bank of Canada.

Activity in Britain’s housing market - where prices sank by a fifth in cash terms after the financial crisis - has been steadily building over the past year, bolstered by an improving economic outlook and government schemes to free up lending.

Typical mortgage rates for new borrowers are now at their lowest since comparable records began in 2004 at 3.08 percent, pushed down by the government’s Funding for Lending Scheme and a less risky economic outlook, despite a rise in government borrowing costs in recent months.

Earlier this month the government brought forward further measures to make it easier for borrowers with low deposits to get a mortgage - something it says will boost affordability and construction, but which critics fear will only push up prices.

House prices are already 6 percent higher than a year earlier, and with the economy growing at an annualised rate of more than 3 percent, look set to rise further.

However increases are concentrated in London and nearby, and prices are falling in real terms elsewhere in Britain.

As a result, the Bank of England - which will review the government’s new Help to Buy housing support schemes next September - has played down concerns of a housing bubble.

BUSINESS AND CONSUMER LENDING UP

Nonetheless, some economists worry that British households have not yet paid down enough of the debt they built up before the 2007-08 financial crisis.

“The nagging concern is that policy stimulus measures will be left in place for too long and will ultimately prove destabilising,” said RBS economist Ross Walker.

“Any resumption of a rise in household debt-to-income ... would be a concern. Thus far, growth in cash lending remains muted, but past experience warns how difficult it can be to rein in rampant credit growth,” he said.

Net unsecured consumer borrowing grew at an annualised rate of 4.4 percent in the three months to September, though the 411 million pound increase in September alone was smaller than economists had expected and what was seen in earlier months.

Net business lending - which the BoE and the government are keener to promote - picked up after a sharp fall in August and rose by 720 million pounds, the biggest jump since January, but is still 3.2 percent lower than a year earlier. Lending to small and medium-sized firms fell by 383 million pounds.

“If lending to the corporate sector turns round significantly, that will undoubtedly be seen as a very welcome development at the Bank of England and Her Majesty’s Treasury, where slow credit growth in the corporate sector is perceived as a key constraint on business investment,” said RBC’s Larsen.

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