Interest rates pare back borrowing

The total value of all loans approved, including those for remortgaging, also slipped to £23.92 billion, down from £25.54 billion the previous month.

Philip Shaw, an economist at Investec, said: “Today’s figures are a strong pointer that the UK housing market is slowing down. What isn’t clear is if this is a one-off number or the start of a trend.

“Taken on their own, both the figures for mortgage lending and commitments are very soft, suggesting housing market activity has been dented by rate rises in early spring and summer.”

Today’s figures come a month after the Bank of England said consumer debt had topped the £1,000 billion (£1 trillion) mark for the first time during June, sparking fears that people had taken on unmanageable levels of borrowing.

There were also concerns that the rate at which consumers were taking on debt was accelerating, increasing at its fastest rate since September 2003, following relatively subdued months in April and May.

But despite July’s more subdued picture, advances through credit cards, loans and overdrafts remained strong, with people borrowing a record £18.56 billion through unsecured lending.

However, high levels of repayments meant outstanding unsecured debt rose by only £1.76 billion, compared with a jump of £2.17 billion in June.

Mr Shaw said: “The relative strength of consumer credit is a reminder that though the housing market may be slowing down, the same may not be true of the high street.”

He said the Bank of England’s Monetary Policy Committee would want to see unsecured credit ease in line with mortgage lending, suggesting there would still be further interest rate rises to come.

But he added that the committee was likely to keep rates on hold when it meets next week, probably not raising them again until November.

Data from estate agents and chartered surveyors has suggested that the housing market has begun to slow as potential buyers feel the impact of higher borrowing costs, with some surveys showing slight price falls.

However, the weakness has yet to filter through to figures produced by mortgage lenders Halifax and Nationwide, which showed house prices rising by 1.3 per cent and 2.1 per cent respectively during July.

Robert Prior-Wandesforde, of HSBC, said: “The Bank of England will no doubt take some comfort from this release, supporting its notion that the housing market is finally responding to the interest rate medicine.

“It is, nevertheless, far too early for the Bank to claim victory. It may be that part of the weakness was related to the unusually poor weather, which also depressed retail sales.”

He added that mortgage approvals were still consistent with a 10 per cent to 15 per cent rise in house prices.

“The MPC looks likely to remain on hold until November, when the next inflation report will be released.

“We also continue to expect a couple of further hikes early next year when it is clear that the UK consumer and housing market is not slowing as much as the Bank anticipates.”

Separately, building societies in the UK have recorded their strongest growth for seven years, accordding to KPMG.

The professional services firm said that 14.6 per cent rise in assets across the sector took total building society holdings up to £224.8 billion.

The Nationwide Building Society powered the growth with an increase in assets of nearly 19 per cent in 2003/2004, compared with 15 per cent the previous year. Nationwide accounts for 45 per cent of the sector, with assets of over £100bn at April 2004.

Kent Reliance was the fastest growing building society for the second year running, with a 37 per cent increase bringing its assets to £838m.