Fall in consumer borrowing raises hopes of slowdown in housing market

The financial markets are braced for a key report on house-price inflation this afternoon after figures out yesterday indicated that the market is about to turn.

The financial markets are braced for a key report on house-price inflation this afternoon after figures out yesterday indicated that the market is about to turn.

The growth in mortgage lending fell in February for the second month running, falling to £3.25bn from £3.31bn in January and £3.50bn in December and November.

It was accompanied by a fall in credit card and other borrowing to £1.16bn from £1.29bn. This will raise hopes that four recent hikes in interest rates have begun to bite on the consumer economy.

But the data painted a mixed picture, with the number of mortgage approvals surging to 105,000 - a three-year high - from 94,000 in the previous month.

Stewart Roberston, UK economist at Lombard Street Research, said: "While the house and mortgage markets remain strong, evidence of a slowdown as a result of higher interest rates is emerging."

But Ciaran Barr, the UK chief economist at Deutsche Bank, said: "Despite some signs of easing in the housing market, these figures continue to illustrate the underlying strength in the market."

The data has focused attention on today's figures for March from Nationwide building society, the second largest mortgage lender. Last month it recorded a 2.2 per cent monthly surge, taking the annual rate to 15 per cent - the highest since the peak of the Eighties boom 11 years' ago.

"We don't expect to find any evidence of slackening pressure on prices," said Carl Weinberg, of High Frequency Economics. "This should be a red rag to the Bank of England."

The MPC meets next week for the first time since the Budget. Fears of another hike have grown after the detailed figures from the Treasury showed that the Government plans substantial rises in public spending.

Economists and central bankers worry about the housing market because a surge in house prices can fuel an inflationary increase in spending - either because of the feel-good factor or because homeowners cash in on the paper gain in the price of their property through remortgaging.

This later process - known as equity mortgage withdrawal - has accelerated recently. Figures from Nationwide show it rose from £1bn in 1988 to almost £10bn last year. Even as a share of real disposable income, which takes account of rising wages, it surged from 0.2 to 1.7 per cent.

Michael Saunders, of Salomon Smith Barney, said mortgage loans were been matched by total spending on homes and that gap had now grown to £3.6bn or 2.3 per cent of income. "We have echoes of the late 1980s with a sharp rise in house prices that helps to fuel consumer spending. Base rates will have to rise soon," he said.

But Robert Barrie, of CSFB, said the volume of equity withdrawal had not been matched by an increase in consumer spending, indicating the money was being used for non-inflationary purposes such as investment. "The housing market is not such a great worry," he said.