Bouncing, not booming
Strength in the UK housing market is obscuring a credit-lite recovery in the broader economy. It is easy to see why there is concern about a British house price bubble, but the bigger worry should still be the sustainability and breadth of the economic revival.
The European Commission is the latest to signal its alarm about rising house prices, especially in London. The annual rate of house price inflation nationally was 11 percent in May, says Nationwide. Property in the capital is indeed bubbling, on foreign capital. But elsewhere, prices are only just catching up with their pre-crisis peaks.
The latest data from the Bank of England belies the popular impression of a lending binge. Mortgage approvals fell in April for the third month running to a nine-month low, and three-quarters of the average monthly level since 1993. The Mortgage Market Review being conducted by the Financial Conduct Authority may have led lenders to tighten up, by forcing them to ask tougher questions of potential borrowers.
The government’s Help to Buy mortgage guarantees do not help, as the EC warns. Yet the harmful side effects are so far limited. In the six months to March, the scheme was involved in just 1.3 percent of total home loans issued. The government should indeed get out of the mortgage market. The good news is that it hasn’t much got into it.
Nor is credit flowing freely to corporates. In April, net bank lending to businesses fell by 2.4 billion pounds and is down by 4.1 percent in the past year. The BoE’s Funding for Lending scheme aims to help small and medium-sized enterprises. Yet loans to this group are down by 3 percent in the past year. Again, an official scheme to send credit spinning through the UK economy isn’t working terribly well.
So what is the source of the UK’s annualised 3 percent growth, the best in Europe? The French economy is above its pre-crisis level. The UK is bouncing back belatedly, having gone down a long way. UK average earnings are only just catching up with falling inflation.
Still light on credit, weak in exports to a deflated Europe, and with a government still in deficit, the sustainability of UK growth remains in question.