Households are borrowing more than £1 billion each month to finance new cars, holidays and big-ticket consumer items in a spending splurge that economists warn could fuel another dangerous debt bubble.
Figures from the Bank of England showed that unsecured lending to households rose at the fastest pace in a decade in January, rising by 9.1 per cent, a level not recorded since 2006. In total, consumers borrowed £1.6 billion in January, up from £1.1 billion the month before.
In what was described by economists as a rediscovered “zeal for borrowing”, £500 million was piled on to credit cards in January. In total, households owe £63.8 billion on credit cards and £115.7 billion in other loans, excluding mortgages, as low interest rates continue to drive up demand for unsecured credit.
This follows on from a spike in borrowing in November, when shoppers made the most of deals during the Black Friday weekend before Christmas and growth in consumer credit jumped by £300 million that month to £1.6 billion.
The sharp growth in consumer credit is likely to cause concern for Bank of England policymakers, who will be worried that Britons are making themselves vulnerable if another financial downturn were to occur.
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“What we are seeing is the early stages of what could potentially be another debt problem,” Samuel Tombs, chief economist of Pantheon Macro-economics, said. “I think the Bank of England will have to act fairly soon this year to cool lending.” The Bank’s financial policy committee has said that it may raise the amount of money that banks are required to put aside to cover their lending as the economy continues its recovery from the financial crisis.
Some debt charities have expressed concern about the pace at which consumers are taking on credit.
Martin Beck, senior economic adviser to the EY Item Club, said: “The Bank of England has expressed increasing concern about the frothiness of the lending data in recent months, so while the FPC may not intervene in the buy-to-let market, broader action is possible.”
Mortgage approvals also soared in January, jumping to the highest level in two years, in a sign that would-be landlords are rushing to buy homes before the extra 3 per cent stamp duty on buy-to-let properties and second homes takes effect in April. The total figure for mortgage approvals in January was 75,581, hitting the highest level since January 2014 and up strongly from 71,335 in December. It also surpassed economists’ expectations of 74,000, but was still significantly below the pre-crisis rate of more than 100,000 a month.
Many analysts believe that mortgage approvals will fall once the new stamp duty charge comes into effect.
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Ruth Miller, of Capital Economics, said: “The stamp duty surcharge should only provide a temporary stimulus to the housing market. Once this temporary effect fades, buyer demand will probably fall, easing the current upward pressure on mortgage approvals over the remainder of the year.”
Some economists believe that an interest rate rise from the present 0.5 per cent is the only way that Britons will curb borrowing.