Why banks are turning away UK borrowers

Mortgage approvals may be higher than ever, but unsecured lending has slowed dramatically. Have UK consumers finally come to the limit of their ability to spend?

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UK property is more expensive than it's ever been but it seems that people still can't get enough of it.

UK mortgage approvals rose at the fastest pace for five months in June. 120,000 loans were approved for new house purchase.

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But credit card spending was barely changed during the month. And borrowing on personal loans and overdrafts was also weaker than in recent months. In fact, unsecured lending growth was the lowest it's been in 12 years.

So is this a sign that British consumers are sensibly tightening their belts or just that they are finally reaching the limit of their ability to spend?

Even as mortgage companies were approving loans left, right and centre throughout June, unsecured lending slowed drastically. The annual rate of growth in consumer lending is down to 7.3% - the slowest since March 1994. Credit card lending was barely changed during the month, while personal loans growth came in at £0.8bn, below City expectations.

But as we've already pointed out, the slump in credit card spending isn't necessarily evidence that consumers are tightening their belts.

It seems far more likely that it's the banks that are doing the tightening for them. Sector heavyweight HSBC reported its half-year results yesterday. The group saw bad debt charges rise by $613m in the first six months of this year, up 18.7% on the same period in 2005.

Although the bank is becoming concerned about the slowing US housing market, the main culprit for the bad debt surge was much closer to home the UK consumer.

"In the UK, the unsecured personal sector once again contributed the major portion of the impairment charge in the period, largely as a result of rising bankruptcy filings and individual voluntary arrangements."

In response, the bank has tightened up its criteria even at the expense of market share, which has slipped from 11% to 8%. "We are seeing an improvement in the credit quality of more recent originationswe have deliberately reduced our market share of unsecured lending in the UK."

HSBC clearly realises that the UK consumer isn't a great bet at the moment - particularly as going bankrupt has never been easier.

And yet, despite the fall in credit card lending, retail sales have been picking up in recent months. Much of this is to do with the "World Cup" effect. Retailers may well have a tougher second half after all, if people bought a new TV before the football tournament kicked off, they won't be replacing it for quite some time.

But all the same, the money to buy those shiny new TVs has to have come from somewhere. And the answer seems to be from people's houses.

Mortgage equity withdrawal soared in the first quarter of the year, while remortgaging and mortgaging for other' purposes remained strong in June.

But there's a hefty cost involved in using housing rather than credit cards to borrow money. Turning short-term unsecured lending into long-term mortgage borrowing may decrease a household's monthly payments, but it pushes up the overall amount repaid. And the longer it takes people to pay off their debts, the less time they have to save for their retirement.

As economist James Ferguson points out in the current issue of MoneyWeek, the money spent on housing comes at the expense of other things. The UK's official household savings ratio now stands at about 5% - half of what it was in the mid-1990s.

Many people justify this by hoping that their home will provide their pension. "This is despite the compelling evidence that most people need both a house to live in and an income to live off in retirement," says James.

The fact is that a huge proportion of the population is now dependent on house prices rising indefinitely to pay for future consumption.

But as ABN Amro economist Dominic White told Bloomberg: "These numbers aren't sustainable and this kind of activity in the housing market can't go on forever. We think house prices are already overvalued."

We couldn't agree more. And the consequences for people who have loaded their houses with debt will be far nastier than for the ones who have been overworking their plastic cards.

Subscribers can read James's entire piece on the website, by clicking here: When will the housing bubble burst? (/file/16097/when-will-the-housing-bubble-burst.html)

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Turning to the wider markets...

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The FTSE 100 fell 46 points to 5,928. Water utility Severn Trent rose 2% to £12.98 on bid rumours, while publisher Pearson climbed 1% to 727p as first-half results were better than expected. For a full market report, see: London market close (/file/16130/london-close-poor-finish-for-leading-shares.html)

Over in continental Europe, the Paris Cac-40 closed 19 points lower at 5,009. The German Dax-30 fell 23 points to 5,681.

Across the Atlantic, US stocks fell back, as the Federal Reserve left open the door to another interest rate hike in August. St Louis Fed President William Poole said there is still a 50/50 chance of a rate rise at the next meeting. The Dow Jones Industrial Average shed 34 points to close at 11,185, while the S&P 500 fell 1 point to 1,276. The tech-heavy Nasdaq dropped 2 to 2,091.

Overnight in Asia, the Nikkei 225 fell 15 points to 15,440, as renewed nerves about rising US interest rates hit exporters such as car manufacturer Toyota and digital camera maker Canon.

Oil prices were steady in New York this morning, with crude trading at around $74.40 a barrel. Brent crude was a little lower, trading at around $74.95.

Meanwhile, spot gold was little changed, trading at around $632 an ounce after heading as high as $637.50 in earlier trading. Silver was lower, trading at around $11.35 an ounce.

And in the UK this morning, bid target McCarthy & Stone has received a higher offer from a consortium including the Bank of Scotland and retail entrepreneur Tom Hunter. The £10.75 a share offer trumps a £10.30 a share deal that was agreed between the retirement home specialist with Barclays and private equity firm Permira last week.

And our two recommended articles for today...

Why the weak US housing market is bad news for shares

- When markets rally on weak retail sales figures, and a slowing economy is seen as good news, it's time to get out, says Paul van Eeden. That's exactly what's happened in the US in recent weeks. Investors seem optimistic that interest rates will rise no further, but the damage to corporate earnings could already have been done. To find out why the cooling US property market is bad news for stock prices, read: Why the weak US housing market is bad news for shares

What next for Japan's recovery?

- The Bank of Japan's decision to raise interest rates has sent out a strong signal about the country's economic recovery, says Charles Stanley's Jeremy Batstone. Japanese equities are looking very attractive right now, but the economy has further to go before the transition to normality is complete. To find out what's in store for interest rates, bond yields and the yen, see: What next for Japan's recovery?

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.