Housing market conditions have deteriorated - ITEM Club responds to today's lending figures

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s lending figures:

  • Mortgage approvals rose in July, reflecting the unwinding of the bank holiday effects. The weak bounce suggests that housing market conditions have deteriorated.
  • The fundamentals underpinning the housing market are unsupportive and house prices are expected to decline throughout 2012.
  • The decline in consumer credit is disappointing, but the monthly series tends to be very volatile so we would be wary about reading too much into it.

“The increase in mortgage approvals in July was simply a bounceback from the two extra bank holidays in June so doesn't imply an improvement the housing market. If anything, the fact that mortgage approvals are still well below their level in May points to a further worsening.

“The fundamentals underpinning the housing market are unsupportive. Demand for mortgages is low, as households continue to endure a significant squeeze on their finances and are eager to lower their debt burden. Meanwhile tight credit conditions, which are partly a consequence of banks facing high borrowing costs, is restricting credit supply. The Bank's Funding for Lending Scheme, which came into effect at the beginning of August, may go some way in improving the situation, but we still expect house prices to continue declining over the course of 2012. 
“Although July's fall in credit card lending is disappointing, the monthly series tends to be very volatile, so we would be wary about reading too much into one month’s data, particularly given that it came after a larger rise in June. The bigger picture is one of consumer credit remaining broadly flat over 2012 to date. We are optimistic that it will pick up towards the end of the year, as inflation falls and real incomes start increasing, easing the squeeze on household finances. However, with the outlook so uncertain consumers are may be tentative and the recovery is likely to be slow.”