Mortgage debt tops £1 trillion for first time

Mortgage debt in Britain has passed £1 trillion for the first time, the Bank of England revealed yesterday as it reported the strongest rise in new mortgage lending for two-and-a-half years.

The Bank said its seasonally adjusted figures showed total mortgage debt rose to £1.006 trillion last month, up £9.3bn from April. Analysts said it showed the housing market appeared to be in rude health in spite of higher unemployment and squeezed income growth.

The overall amount of outstanding debt in Britain, including credit card debt and bank loans, rose to just under £1.2 trillion, roughly equal to the entire yearly output of the British economy.

The number of new mortgage approvals rebounded to 117,000 last month from 106,000 in April, suggesting the housing market may be entering another strong period after slowing slightly in the spring.

"Certainly, there are no signs of a slowdown coming through in the housing market and it looks as though activity will remain strong over the summer," said David Page, an economist at Investec.

Most experts think the level of secured mortgage debt is not necessarily a problem for the economy since the value of the houses and flats on which it is secured has risen faster.

But George Osborne, the shadow chancellor, said the country was now "mortgaged up to the hilt".

"That's bad news for vulnerable families at risk from the impact of higher interest rates. And it is a risk to the stability of the whole economy," he said.

House prices have boomed for nearly a decade, driven by low interest rates, falling unemployment and rapid income growth. By most measures, however, they are overvalued but have defied predictions of a crash.

Figures from the Nationwide yesterday, though, suggested prices may not be rising as fast as earlier this year. The building society reported a smaller-than-expected rise of 0.3% in the price of an average property this month, taking it to £165,730. The annual pace of growth picked up to 5% - but only because prices fell in June last year.

Fionnuala Earley, the Nationwide's chief economist, said prices had risen just 1% in the second quarter of the year, half the pace of the first three months.

"While demand seems fairly stable, the deterioration in affordability and its likely impact cannot be ignored. Mortgage payments for someone on average earnings now take up around 42% of take-home pay compared with around 32% three years ago.

"While earnings growth remains lower than house price growth, the 'ability to pay' constraint will continue to bite. So, too, will lending constraints in terms of income multiples and loan-to-value limits, especially for young first-time buyers."

George Buckley, UK economist at Deutsche Bank in London, said although the Bank had kept interest rates steady at 4.5% since August, fixed rates had risen by nearly half a percentage point because of changes in financial markets, and this could squeeze house prices.

"We expect that the housing market will continue to slow into the second half of this year on account of those factors, but we do not forecast a sharp correction," he said.

The Bank figures also showed consumer credit had shot up last month by £1.2bn. "Consumer spending and borrowing has clearly been boosted recently by sales of televisions and merchandise related to the World Cup," said Howard Archer, an economist at Global Insight.