Housing sales to drive growth in British economy, but bubble fears remain: economist
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E-mail Xinhua, August 23, 2013
The growing strength of house sales in Britain is an indication of a recovering economy, and it will continue to contribute to a growing recovery, new figures showed.
The Council for Mortgage Lenders, the trade association for residential mortgage lenders, reported this week that based on its estimates, gross mortgage lending hit 16.6 billion pounds (25.8 billion U.S. dollars) in July, up 12 percent from the 14.8 billion pounds figure for June and 29 percent higher than last July.
The Royal Institution of Chartered Surveyors reported a net 36 percent of estate agents are now seeing higher prices with a net 53 percent seeing an increase in the number of people looking to buy a property.
This suggests a strong pipeline of mortgage applications, and the Bank of England's (BOE) credit conditions survey at the same time shows that banks are increasingly prepared to lend.
James Knightley, senior UK economist with ING told Xinhua, "The housing market is so important to Britain and it's exposed to it far more than other parts of Europe where homeownership is far lower. It is tied to wealth, confidence, general sentiment, and the likelihood of people spending."
"So if you get housing activity really picking up and people feeling wealthier and the price of their house going up, people are going to be more inclined to spend and more inclined to borrow," he said.
Knightley explained that if housing activity picks up, it generally leads to other activities such as removals companies doing better, furnishing sales up, a general up-trend in sales that is tied to property transactions.
"It's not just the confidence in consumers and businesses that this creates, it is also the direct economic effect of increased sales," said Knightley.
"Either way, it is a positive story or growth and brings forward the likelihood of interest rates all the more closer."
The British economy has enjoyed a strengthening recovery since January.
The two quarters of rising growth in 2013 -- Q1 0.3 percent and Q2 0.6 percent -- are matched by growing confidence among businesses and the public in surveys.
Economists have consistently made moderate increases in their predictions for growth this year and next year, with a consensus of 1.2 percent growth this year. This is still well behind trend growth of 2 to 2.5 percent.
This all points to 2013 being be the strongest year for mortgage lending since 2008. However, it will be probably less than half of the 363 billion pounds that was lent at the peak in 2007.
The improvement is backed by the apparent effectiveness of the BOE's Funding for Lending Scheme, which has generated increased lending capacity and driven down mortgage borrowing costs and has been extended into 2015
Consequently, lenders are prepared to take on riskier borrowers by offering larger mortgages with smaller deposits required. However, there is the danger of a bubble in housing appearing.
Knightley said, "I think there is the threat that house prices may rise quite aggressively in some parts of the country. A bubble nationwide is unlikely but it is still very uneven."
"In London, the supply is not there but the demand is picking up quite aggressively as confidence improves."
Localized bubbles could be an issue which could influence the BOE's policy decision on interest rates, despite the new focus being on getting unemployment down to 7 percent before a rate rise is considered.
Knightley said, "They have three knock-outs -- inflation, inflation expectations and financial stability. So, if they start to get worried about housing and what that may lead to then the Financial Policy Committee could come in and say we need to act sooner on this and use that as a justification for an interest rate rise." (1 pound = 1.56 U.S. dollars) Endi
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