Mortgage lending hits record £32.2bn and retail sales rise

Mortgage lending reached a record high of £32.2bn last month according to figures released yesterday, suggesting there was no immediate end in sight to soaring house prices. Robust consumer spending was also highlighted by strong retail sales boosted by the World Cup and the hot weather in June.

The Council of Mortgage Lenders said that borrowing in June was 30% higher than in the same month last year. The record levels of lending beat the previous high of £29.1bn set a month earlier in May. The CML said the latest figure reflected the traditional rise in house buying as the summer gets under way, strong house price growth, particularly in London, and high levels of remortgaging.

"Record levels of lending have been achieved in nine of the past 12 months," said CML director general Michael Coogan. "Demand for houses and remortgages remains strong, so we expect to see continued robust lending during the summer months."

The figures were underscored by separate data from the Building Societies Association, which said members had approved a record £6bn in home loans last month, compared with £4.3bn in June 2005. Both organisations cautioned that the likelihood of the Bank of England increasing interest rates was growing and that could dampen lending and demand towards the end of the year. Mr Coogan said that the "risk of an interest rate rise seems more real than earlier in the year".

The threat of rising interest rates prompted the BSA to warn consumers against overstretching their finances and finding themselves struggling to meet repayments if the Bank of England acts.

A third report published yesterday, from the British Bankers' Association, said mortgage lending among its members had risen by £5.6bn in June, down from a £5.8bn increase in May. It said lending in the first six months of the year was 18% higher than in 2005. The pressure on interest rates further intensified with evidence that the recovery on the high street also pressed ahead during June. Figures published yesterday by the Office for National Statistics showed that the volume of retail sales increased by 3.7% over June 2005, much higher than the 2.9% forecast.

In the period from April to June, sales were 2.1% higher than the previous three months, the sharpest growth since February 2004. The value of sales was also up by 3.7% to £24bn in June.

Consumers, though, appear to be putting less on their credit cards. The BBA said there had been net repayments of £700m on credit cards in the first six months of the year, compared to net lending of £1.1bn in the first half of 2005.

Following a brief slowdown in January, retail sales have risen strongly and the ONS said that the World Cup and hot weather had helped continue the increases in sales by increasing the amount of food and electrical goods sold.

Economists said the data were encouraging and a good sign for second quarter GDP figures out today. However, they said the Bank of England would treat the news with caution, especially since the increased demand was not dampened by the strongest price pressures for two years with prices falling much less than the previous month. "This indicates that retailers have recently had to rely less on discounting to get consumers to spend, and that some may have been able to pass on modest price hikes," said Howard Archer, economist at Global Insight.

Analysts suggested the Bank of England could raise interest rates by August. But Bank governor, Mervyn King, said policymakers would wait for any World Cup effect on retail sales to pass before deciding on interest rates. In a speech in Warrington yesterday, deputy governor, John Gieve, played down inflation fears, saying that there were little signs of second round effects from energy price rises.