Mortgage repayments exceed new borrowing

People paid off mortgage debt faster last month than they took on new debt for the first time since records began in 1993, Bank of England figures showed today, suggesting a real housing market recovery could be some way off.

The Bank said mortgage repayments exceeded new borrowing by £418m in July as people are using a period of ultra-low interest rates to pay off the capital on their mortgages, especially if they have benefitted from being on a tracker mortgage. The wider measure of consumer credit also fell back slightly for the first time since 1993, implying that households are responding to the economic downturn by consolidating their finances, getting rid of debt and shunning new credit.

The figures also showed another small pick-up in new mortgage approvals, to 50,000 last month from 48,000 in June, but they remain way below the 80,000 level consistent with rising house prices.

"The numbers of mortgages approved for house purchase each month by the high street banks have continued to recover from last November's low point, but new lending is largely being offset by repayments," said David Dooks of the British Bankers' Association.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to potential homebuyers."The Building Societies Association reported today that its customers borrowed £2bn in July, the highest monthly figure this year, but they repaid £2.65bn.

BSA director-general Adrian Coles said the mortgage market was likely to remain subdued for the rest of the year. "This is primarily because of the difficulties all lenders face in raising funds for mortgage lending," he said.

Richard McGuire at RBC Capital Markets said: "The fact that consumers are, in aggregate, opting to pay down their debts is reflective both of the dearth of affordable credit and, more fundamentally, a flight to savings that we expect will continue in line with the ongoing slackening of the jobs market.

"Worryingly, the Bank of England figures also showed that bank lending to non-financial companies in July fell by a hefty £8.4bn, or 1.7%, on the month. The three-month annualised rate fell by 7.8%, a number described as "astoundingly weak" by Vicky Redwood at Capital Economics and one which makes a mockery of banks' claims to be lending more to companies to help them through the recession.

The Liberal Democrat economic spokesman, Vince Cable, said: "The figures make it clear that businesses right across the country are continuing to feel the squeeze of the credit crunch."If firms are unable to access credit it is likely we will see even more companies going under, deepening the recession and driving up unemployment.

It is becoming clear that the Bank of England's attempts to boost lending are only having a limited impact as banks continue to hoard money."Separate figures showed the jobless rate in the 16-nation eurozone rose to 9.5% last month, its highest in a decade.

The number of unemployed rose 167,000 in July to just over 15 million people. That rise was, however, a lot smaller than the half million a month seen earlier this year.There were significant differences in individual countries. Spanish joblessness, for example, rose to 18.5% from 18.1% in June and 12.5% a year ago.

In Ireland, the unemployment rate rose to 12.5% from 12.2%.By contrast, the German unemployment rate remained stable at 7.7% for the three months to July and has moved up only 0.6 percentage points between September last year and July 2009