Credit Crunch Part II as Younger Borrowers stoke it on

Younger borrowers ‘stoking the next credit crunch’

Overall lending is down, but younger homebuyers are rapidly amassing debt.

By by Richard Dyson3:30PM BST 23 Aug 2013CommentsComments

Mortgage data from the British Bankers’ Association shows total lending continues to shrink as repayments exceed new borrowing across the book. While approvals for new loans grew 30pc on last year, according to the BBA’s data published today, and while gross lending also increased, combined mortgages outstanding shrank by £100m to give a total mortgage tally of £780bn.

July 2013 data from the British Bankers’ Association

This trend – apparent in the “net” borrowing figure in the graph, above – has been a feature of the market for 18 months. The BBA said “higher repayment continues to generate the contractions in borrowing stocks seen over the past year and expains the subdued picture of net borrowing.”

But the overall picture of contraction hides pockest of strong borrowing growth, especially among younger buyers. Two weeks ago the Council of Mortgage Lenders’ figures showed a 30pc surge in first-time property buyers, with 68,000 first-time loans advanced in the three months to end-June 2013, up from 49,000 in teh samer period of 2012.

The number of loans is historically low but high house prices means the average sum advanced – £117,000 in July – was almost as high as has ever been recorded. The all-time high for the average first-time mortgage was in July 2007, at the pinnacle of the housing market, when the figure reached £118,999.

The clash between this picture of expanding lending at the bottom of the housing ladder and the total decline in mortgage balances is causnig some commentators to fear borrowing “hot spots”, likely to focus around borrowers in their thirties and early forties.

Richard Jeffrey, chief investment officer at fund manager Cazenove Capital Management, has warned debts now being amassed could be unsustainable and result in a re-run of the crisis. He said: “The reason the UK recession was so deep was that the household sector had previously got itself into dire financial straits – encouraged, it may be added, by a protracted period of below-normal interest rates. Debt-to-income levels rose to unprecedented highs leaving borrowers massively squeezed when interest rates rose and again when real incomes were squeezed by persistently high inflation.”

Speaking of new Bank of England Governor Mark Carney’s decision to keep rates low until unemployment fell, more or less regardless of other economic indicators, Jeffrey said: “It would seem bizarre that almost by definition one of the measures of success of current policy will be a renewed increase in the debt-to-income ratio. It would be easier to defend the government’s commitment to make more mortgage finance available to households were this to be at sensible interest rates. Sadly, we have in the making, at least for a proportion of households, the next credit crunch.”

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