It was no shock that the Bank of England decided to put a hold on interest rates last week. It has never been the intention of the Bank to precipitate a crisis in the economy but rather to slow down consumer spending, and the housing market in particular.
The five rate rises since November last year seem to have had the desired effect in terms of the housing market. They have added nearly a third to the monthly cost of a variable rate mortgage. Consumers must be starting to feel the pinch. Figures released by the BSA for July indicate that although lending is still looking strong, with gross advances standing at £5,125m (their highest since last October), the approval figures indicate that people are now looking to remortgage.
Approval figures show loans that have been promised but not yet made and the BSA's figures suggest that with interest rates rising people may be starting to fix their mortgages in order to gain a measure of certainty on their repayments in response to the strong message coming out of the Bank of England.
This was backed up by data released by the British Bankers' Association which showed that approval numbers were 9.9% weaker than June and 19.5% weaker than July 2003. In addition, the Nationwide building society released data earlier this month showing that house price inflation was just 0.1% in July – well down on the rise of 2.1% the previous month.
A slowdown in consumer confidence and spending is also indicated by information from the British Retail Consortium which shows that sales last month were just 1.1% higher than August last year on a like-for-like basis, and well down on July's 1.8% growth.
The Monetary Policy Committee has to tread a fine line, balancing the differing needs of various sectors within the nation's economy without tipping it into recession.
The manufacturing base, which saw output rise by 0.9% in the second quarter of this year, is still vulnerable to a downturn in demand in the global economy. This could be caused by a number of things including rising oil prices. But the housing market has been rising at unsustainable levels for some time. Added to this, there is no sign of general inflation rising and unemployment is still at a near-record low.
However, consumers have been far slower than the Bank anticipated in reacting to interest rate rises and some City experts are still not convinced that this is really the start of a slowdown. The fall in retail figures might reflect the fact that it has been an exceptionally wet August rather than a loss of consumer confidence. A slowdown or even fall in house prices in some areas is not surprising given the level of growth in the market and overall Nationwide is still predicting that prices will have risen by 15% by the end of 2004. There have been a number of false starts for the pundits predicting the start of the slowdown. During the summer of 2000 prices fell four times consecutively between April and August after a number of rate rises. This did not turn into a long-term soft landing as we now know.
There has also been some criticism of the softly, softly approach adopted by the Bank but it now appears to be working. A hold on interest rates is the sensible decision and the Bank's caution in deciding not to increase rates is to be welcomed. All the evidence suggests that people are starting to get the message and the Bank, as Charlie Bean, its chief economist, puts it, “is not in the business of trying to clobber the consumer”.
Despite the caution expressed by many that this could be a summer blip rather than the start of a soft landing the BSA is still anticipating a slowdown in the housing market but not a crash. It may be that this cooling means that there will not be another rise this year and interest rates have peaked at 4.75%. If there is a need to further temper consumer spending there could be another small rise in rates but not until early next year, and even then they will probably peak at 5% or 5.25% in the first quarter.
I should know but i don't
Q: I know mortgage regulation begins on October 31 but if I'm not regulated what are my options
A: It's important to recognise that it becomes a criminal offence to advise on, or arrange, mortgages after October 31 if you are not authorised to do so by the FSA. Individuals found doing mortgage business without proper approval after that date are open to substantial fines and even being barred from working in the industry again.
The alternatives are few – become an introducer of business to a firm that is regulated, move into the non-regulated areas (parts of the buy-to-let or commercial market, if the lenders will accept your business), or exit the industry entirely.
If anyone tries to 'borrow' a firm's FSA number to continue to place business they endanger themselves, the firm whose number is used and perhaps even the lender who accepts the business. The validity of the mortgage may be called into doubt.
The FSA regime is more comprehensive and its sanctions more substantial than that of the MCCB. Time is running out and firms must make their final decisions now.