Focus on the UK Consumer

By: Mike Shedlock | Thu, Sep 22, 2005
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According to the UK Guardian Remortgaging pushes lending figures to new high.

A boom in remortgaging boosted August's mortgage lending figures to the highest level since July 2004, and one of the highest on record, lenders said today.

The Council of Mortgage Lenders (CML) said total mortgage lending for the month had reached £27.5bn, an increase of 9% over the month and 4% more than in August 2004.

"The doom-mongers' prophecies look to have been wrong, as lending has continued to strengthen over the summer," said Michael Coogan, the CML's director general. "Although the market remains far from spectacular in terms of transaction numbers and house prices, the prospects of a significant market correction are receding.

The doom-mongers prophecies are wrong huh? Wrong about what? With fixed rate mortgages now averaging 5.23% and variable rate mortgages averaging 5.61% why wouldn't one expect to see a lot of refis? This is probably a good thing for mortgage loan originators and consumers but is this a good thing for bank profit margins? Does it mean that those proclaiming a collapse in spending were wrong? Hardly. What the doom-mongers have been prophesizing was that spending in the UK and the US was simply unsustainable. Now as housing prices in the UK are no longer supportive of consumption, we are finally starting to see some consumer pain.

According to Credit card lending plummets with Consumers' enthusiasm for credit cards and loans waning as debt fears continue to quell their spending.

Spending on credit cards dropped by a record £146m in August according to the UK's banking industry.

It was the second time consumers paid off more on their cards than they spent this year following a £40m drop in net lending in April. Prior to that, the last fall in net card lending was 12 years ago, said the British Bankers' Association.

Demand for personal loans is also drying up, with figures from the Nationwide Building Society showing lending in the three months to the end of July was 8.2% lower than the same period last year.

The slowdown reflects the fact that banks have scaled back on the launch of cards offering 0% interest on balance transfers. Borrowers now usually have to pay a fee of up to £50 to switch balances to a new card.

Consumers are also becoming more concerned about their level of indebtedness as the UK debt mountain tops £1 trillion and the future of the economy remains clouded.

Although interest rates recently fell, there are persistent fears that Gordon Brown will have to raise taxes to fund his spending plans and this could impact on consumers' disposable income.

Nationwide said the demand for personal loans was led by a desire to consolidate existing debts and credit cards, with demand for straightforward purchase loans slowing down.

The Guardian is also reporting 34% of Britons are running out of money five days before payday.

A third of Britons are unable to make their wages last an entire month, with 34% running out of money five days before payday, research revealed today. As a consequence, the research claims, the average Briton spends 23 days every year living in the red.

The survey, carried out for the internet bank Egg, showed that of those who said they ran out of money before payday, 18- to 29-year-olds fared the worst, with cashflow drying up a full week before the wages hit their bank accounts. This adds up to 74 days a year, compared with 66 days a year for 30- to 50-year olds. Those in Scotland who said they ran out of cash each month were the quickest to do so, spending an average of six days a month, or 73 days a year, with no money in the bank.

"A staggering 16 million Britons run out of cash each month and often resort to expensive overdrafts to make it through to payday," said Andy Deller, Egg's chief marketing officer. "Consumers can easily slip into the red each month if they don't have a clear figure of what they can afford to spend."

The bank said that this poor budgeting is proving expensive for consumers, who often borrow at an average overdraft rate of 12.6% and unauthorized rate of 24.3%. Almost a third of consumers paid an average £27 in penalty charges over the year.

This is not a "soft patch". This is a serious problem as people in the UK bought more house than they could possibly afford and consumption was supported only by rising home prices. The party is over in the UK and the party seems to be coming to a rapid close in the US as well. Meanwhile the FED is still hiking interest rates trying desperately to take away the punch bowl before it's too late. Unfortunately for the FED, it's too little too late to do any good. The punch bowl is already empty, and consumers are tapped out here too. The FED likes to deal with aftermaths rather than preventing bubbles in the first place. They will soon get a second chance.


Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit to learn more about wealth management for investors seeking strong performance with low volatility.

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