Stormy times

Doom and Gloom for the Economy

19-September-2008, Writes Hazel Cottrell hazel.cottrell@consumerchoices.co.uk

Inflation and unemployment rates soar at 16 year highs, while mortgage lending falls to a six year low.

According to figures released yesterday by the Council of Mortgage Lenders (CML), Britons borrowed just £21.8 billion to buy homes in August, 12% less than in July. Last month’s borrowing represents a decrease of 36% compared to August 2007, it is the lowest monthly figure since April 2005 and the lowest August figure since 2002.

Mortgage lending normally peaks in the summer, so this August slump clearly demonstrates the population’s current lack of confidence in buying houses. Mortgage lending in the UK has been on a gradual decline for most of the year, with only one unexpected jump in July, and it is expected to continue in a downward spiral.

The fall has been blamed on expectations of further falls in house prices combined with banks tightening their lending criteria and many demanding higher deposits and larger fees.

Michael Coogan, director general of the CML, said: “These figures reflect the heightened uncertainty for both lenders and consumers in the mortgage market at present. Lenders are uncertain about future sources of funding and the cost of funding, while consumers are unsure about how much further and for how long house prices will continue to decline.”

Last month food and energy prices pushed the annual inflation rate to 4.7%, a 16 year high which prompted analysts to describe the situation as the worst financial market crisis of this century. The level of inflation is more than double the governments 2% target and forced Mervyn King, governor of the Bank of England, to write an explanatory letter to Alistair Darling.

The Office for National Statistics said that increases in the cost of energy had pushed up household utility bills, adding 0.3 points to the inflation rate as measured by the consumer prices index. The 13% rise in food prices also added to inflation, however this was offset as the cost of petrol dropped as a result of falling oil prices.

Further figures released this week by the Office for National Statistics show that the number of Britons claiming employment benefit is increasing at its sharpest rate since December 1992. The number of claimants in August stood at 904,900 (or 2.8% of the total population), representing the seventh consecutive monthly rise.

Chris Eagle, commercial manager at Credit Choices says: “These are truly difficult times for the economy and the increasing levels of unemployment are very worrying. This week’s dramatic events in the financial sector are likely to cause further trouble for the housing market, not only with regards to consumer confidence but also because the turmoil is likely to cause lenders to tighten their acceptance criteria further and potentially increase their interest rates.”