Credit binge as 179,000 take out home loans

Rising borrowing costs failed to deter UK consumers from going on a debt financed spending spree last month, bolstered by the robust housing market.

The numbers of people taking out mortgages reached 179,000 - a record for the year, according to figures released yesterday by the Council for Mortgage lenders. While not reaching the peaks of the summer, the CML said the figures were unexpectedly robust, considering that the market normally slows down around Christmas. Gross lending rose by £11bn over the month, the steepest rise since July.

"November's lending figures suggest that the housing market remains stronger than might be expected for the time of the year," said CML director general Michael Coogan. "However, with the prospect of further interest rate rises in the new year and the abolition of mortgage interest tax relief in April, we expect the rate of increase in house prices and the number of property sales to begin to abate."

However some economists see no signs that the property market is slowing. "[The data] is consistent with demand in the housing market remaining firm," said Michael Hume, UK economist at Lehman brothers. "Consequently it points to stronger house prices over the next couple of months."

Bank and building society data showed a sharp rise in lending to consumers through credit cards and overdrafts suggesting households went on a debt-financed spending spree in November. The Bank of England said overall lending to the private sector rose £9.5bn in November, helping to boost the broad measure of money supply by 0.4% over the month.

The figures are a sign that the Bank's two quarter-point rate increases have failed to put consumers off using debt to finance spending.

"It seems that consumption is being fuelled by increased borrowing," said Tim Sweeney director general of the British Bankers' Association. The BBA's figures showed consumer credit rising by £674m over the month, the steepest increase since March.

Most city analysts are now pencilling further rate rises from the Bank early in the new year to prevent rising consumer spending, soaring house prices and building pay pressures in the labour market from pushing inflation above the government's 2.5% target.

Base rates may have to increase to as high as 8% by 2002 to slow the economy down, according to the Centre for Economics and Business Research. In a report published today, the CEBR predicts that the chancellor Gordon Brown will relax constraints on public spending next year, adding fuel to an already booming economy.

"The chancellor will not find it politically possible to fund a sufficiently tight fiscal policy in the run-up to an election, and the international economy will blow warm rather than cold air over the UK," the report says.

Output will increase by 2.3% next year and by 3% in 2001, according to the CEBR. Above trend growth will force the Bank to put the brakes on through dearer borrowing. But it will be an unpopular move because in the short-term inflation should be well below target due to one off factors like the impact of the Internet and prices cuts from gas and electricity suppliers.