Consumers ignore warnings and set mortgage record

Britain's borrowing boom continued in July as consumers shrugged off warnings of a housing market slowdown to pile up record mortgage debts, Bank of England figures revealed yesterday.

As the Bank's monetary policy committee prepared to meet this week to set interest rates, news that net mortgage lending in July, £8.35bn, was the highest since records began in 1993 underlined the concerns of some MPC members that the pace of borrowing has become unsustainable.

The number of new mortgages approved rose to 111,000, the highest since last November, the Bank said, reflecting Nationwide building society's report last week that house prices rose by 1.1% in August.

Net consumer lending, which includes credit cards and personal loans as well as mortgages, was £9.9bn in July - just below June's record level of £10bn. Consumer credit was weaker than a month earlier at £1.5bn but, with mortgage borrowing up 26% year on year, analysts said homeowners could be using mortgage equity withdrawal to pay for their spending instead of reaching for credit cards.

Policymakers have expressed concern in recent months that consumers are overstretching themselves by betting on interest rates remaining at historic lows indefinitely. MPC member Paul Tucker said in a speech last week that households should plan their finances on the basis that rates will eventually have to go up.

The Conservatives' Howard Flight, shadow chief secretary to the Treasury, blamed rising taxes for pushing consumers further into debt. "Taxation has gone up by 50% since Labour came to office. When taxes rise, people have to choose between spending less and borrowing more."

Vince Cable, Liberal Democrat trade and industry spokesman, said the government should force lenders to behave responsibly. "Aggressive lenders must be reined in and the public need to be aware of the dangers of imprudent borrowing."

The new surge in borrowing is expected to contribute to a no-change decision at the rate-setting meeting on Thursday, leaving borrowing costs at their 48-year low of 3.5%. Minutes of the July meeting showed that MPC members hoped cutting rates would not cause a new frenzy of borrowing, but yesterday's data cast doubt on that judgment.

"We continue to believe that the authorities will want to see the economic recovery more firmly grounded before pushing up base rates," said Simon Rubinsohn, chief economist at Gerrard. "While it is true that households are continuing to borrow heavily, the squeeze on purchasing power means that, were they not to do so, consumer spending would grind to a halt."

Mr Rubinsohn added that, despite July's slowdown in consumer credit, the average household now owes £6,900 in unsecured debt - up from less than £3,700 in 1998.