By David Milliken
LONDON (Reuters) - British lenders approved the fewest mortgages in almost a year last month, but overall lending grew solidly, giving mixed signals about how much the housing market was slowing before new curbs were announced last week.
Bank of England Governor Mark Carney last week named growing household debt linked to rapidly rising property prices as the biggest threat to Britain's financial stability, and imposed new measures to rein in mortgage lending.
Lenders had already been cutting back earlier this year on how many mortgages they issued, after regulators said that from April they would have to check more carefully whether home-buyers could still afford loans if interest rates rise.
Figures from the BoE on Monday showed that mortgage approvals for house purchase dropped to 61,707 in May, from 62,806 in April. This was a marginally smaller fall than economists had forecast but still the lowest reading in 11 months and well below a pre-crisis average of over 100,000.
What is less clear is whether the drop is part of a temporary decline as lenders adjust to the new rules, or if the new lending rules will permanently reduce access to mortgages.
Rob Wood, chief UK economist at German bank Berenberg, said he believed the latest data represented a brief steadying in the housing market, and that house prices would continue to rise at an annual rate of 10 percent this year and next.
"In our view, the BoE was right to start taking action on the housing market last week. Its gentle measures will not derail the housing market and indeed will not even bite directly until probably mid-next year," he said.
The BoE itself said the same on Thursday, and Spencer Dale, a senior BoE official in charge of financial stability, said in an interview with the Mail on Sunday newspaper that the central bank was not able to keep a lid on house prices.
"When people come to judge the success of this policy in, say, two years' time, do not judge us on what has happened to house prices, judge on whether we have controlled the levels of household indebtedness," he said.
MORTGAGE LENDING SURGE
Monday's figures show that net mortgage lending is now rising at its fastest rate since the financial crisis after jumping by nearly 2 billion pounds in May alone, comfortably beating forecasts for a 1.6 billion pound rise.
However, the 1.7 percent annualised growth rate for total mortgage and consumer lending in the three months to May is still low compared to growth rates above 10 percent in the years running up to the financial crisis.
"While credit growth is picking up, the economic recovery is still – at this stage - chiefly not credit-driven," said Michael Saunders, chief UK economist at Citi.
But overall household debt levels remain high, and ratings agency Moody's said fast-rising house prices, sluggish earnings growth and the prospect of higher interest rates were unlikely to improve the situation.
"High levels of debt leave households, and thereby the economy and banks, vulnerable to other possible external or domestic economic shocks," it said.
Moody's said it was plausible that mortgage interest rates could increase by 2-3 percentage points over the next 2-3 years, markedly reducing the affordability of mortgages.
Many economists expect the BoE to raise rates before the end of the year, and BoE deputy governor Charlie Bean said in a television interview on Sunday that it would be reasonable to assume rates would rise around the end of the year.
But the central bank has also been at pains to stress that it expects rate rises to be gradual, with Bean saying it could take more than a decade for BoE interest rates to return to their pre-crisis average of 5 percent.
Carney said on Friday that the 'new normal' for interest rates would be much lower than before the financial crisis, and could be similar to market forecasts of interest rates of around 2.5 percent in three years' time.
BUSINESS LENDING UP
Monday's figures show business investment grew at an annual rate of more than 10 percent in the first three months of this year, its fastest growth rate in two years.
Net lending to non-financial businesses rose by 3.41 billion pounds in May, the biggest monthly increase since the central bank started collecting the data two years earlier.
"Firms may be increasingly confident to use loans... to finance their growth. This makes us increasingly confident ... that investment will continue to expand at a rapid clip," said Martin Beck, an economic adviser to accountants Ernst & Young.
But the picture was less encouraging for smaller firms, some of which have had a troubled relationship with banks since the financial crisis. Net lending to them was down by 152 million pounds in May and is 2.8 percent lower than a year before.
(Additional reporting by Karolin Schaps; Editing by Ruth Pitchford)