Mortgage lending surges in UK
AFX News Limited
UK July net mortgage lending surges to highest level since Sept 2003 - BoE
08.30.2006, 05:49 AM

LONDON (AFX) - UK mortgage lending surged to its highest level in nearly three years in July, suggesting that the buoyant housing market shows no sign of slowing, figures from the Bank of England showed.

The central bank said net mortgage lending surged by 9.8 bln stg in July, the highest level since September 2003 and well above analysts' forecasts for a more moderate increase of 9.0 bln stg.

The figure is far more than the six-month average of 8.9 bln stg and follows a 9.0 bln stg rise in June.

Further evidence of a strengthening housing market -- despite house prices already at elevated levels and affordability seen as extremely stretched -- will concern rate-setters at the Bank of England and increase expectations that interest rates will rise again in the coming months, possibly in November.

The BoE also said the number of approvals for house purchases, often seen as a good indicator of future demand in the property sector, remained very strong, totaling 120,000, the highest since January and above expectations for a reading of around 118,000.

June's approvals numbers were revised down to 119,000 from 120,000 previously.

The total value of mortgage approvals, which also includes remortgaging, was 29.0 bln stg in July, down slightly on June's figure of 29.4 bln stg but still above the 28.7 bln average over the past six months.

Some of these concerns may be offset, however, by further subdued data on consumer credit, as secured and unsecured borrowing continued to show divergent trends.

The BoE said net consumer credit was 1.1 bln stg over the month, against expectations for a 1.0 bln stg rise and in line with the six-month average. In June, consumer credit rose by 0.8 bln stg.

A more detailed breakdown of the consumer credit data showed that credit card lending increased by 0.16 bln stg after a rise of just 0.7 bln in June.

Meanwhile, other loans and advances, such as overdrafts rose by 1.0 bln stg after a 0.8 bln increase in June.

Overall net total lending, which combines lending on dwellings and consumer credit, rose by 10.9 bln stg, the highest level since June 2004 and following a 9.8 bln stg rise in June.

jessica.mortimer@afxnews.com

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Nouriel Roubini | Aug 30, 2006

The revised Q2 figures are out and the headline figure – 2.9% growth – is better than the initial advance estimate of 2.5%. Right after the publication of these revised figures today the spin doctors have been in a frenzy to use this number to prove that the economy is fine.

First in the line among these spin doctors is “Eighth Inning� Dallas Fed President Richard Fisher – yes the same Fisher who firmly predicted in June 2005 that we were at the “eighth inning� of the Fed tightening cycle and then went on voting another nine times for a Fed Funds raise. An hour after the release of the new Q2 figures he stated in a speech:

"We are slowing down, but this number may help us keep it in perspective,'' Federal Reserve Bank of Dallas President Richard Fisher said today after a speech in Dallas. ``We could not have kept growing at the rate we were growing in the first quarter.'' He called the figures today ``pretty healthy,''

This is also the same Fisher who – in a previous speech – called me and other realists who are worried about housing and the economy an Eeyore.

Beware of these spin doctors. Behind the headline figure, the numbers in the revised Q2 figures are much worse than the initial estimate. Essentially, almost all of the upward revision to the figures comes from a much larger increase in inventories of unsold goods, an ominous signal for future growth as firms saddled with unsold goods will soon start cutting production (as it is happening, for example in the auto sector). Indeed, if you exclude inventories and look at final sales, the figures are much worse: in Q2 final sales of domestic product grew only 2.3%.

The GDP growth improvement is also due in part to slightly better net exports but beware of this. The fact that now net exports are not anymore a drag on growth is also bad news, not good news: as the economy sharply slows down imports of consumption and investment goods are slowing down. Thus, the news from net exports is also lousy as it signals the coming recession: net exports improve when an economy slows down and worsen when the economy grows fast. Indeed, the figures about a fall in imports - a -0.1% in Q2 – are a clear indication that, as the economy is sharply slowing imports are falling.

The sharp increase in inventories is particularly worrisome since, as in any inventory cycle, an increase in such supply of unsold goods, is a leading indicators that firms will tend to reduce production when faced with slowing demand and rising inventories. So, higher GDP figures for Q2 via higher inventories means that – all equal – Q3 and Q4 figures for GDP growth will be worse than otherwise as a sharp inventory adjustment will occur; indeed, the Ford decision to cut production by over 20% in Q4 is a typical – if extreme - canary in the mine in terms of signaling how corporates will react to a sharp unexpected increase in inventories.

The new data also confirm that the bust in the housing market is even greater than initially estimated: real residential investment fell in Q2 at an annualized rate of -9.8%, much worse than the initial estimate of -6.3%. Given these revised figures I now expect that real residential investment will fall closer to a 20% annualized rate for the next few quarters. As I discussed in a number of recent writings (here and here and here) this housing bust will be a crucial driver – both directly and indirectly of the coming economy-wide recession that I am predicting.

I agree with your prediction, and for the life of me do not understand the basis for the recent rally in equities.

Here is a very good article about the correlation of housing data with the stock market 12 months later.

http://www.safehaven.com/showarticle.cfm?id=5772

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