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House price inflation casts shadow over signs of UK recovery


By Emily Cadman


Rapid house price inflation is casting a shadow over an otherwise positive run of data showing the UK economic recovery is strengthening and broadening.

A poll of manufacturers showed activity in Britain’s factories increased in April at the fastest pace for five months.

The Markit manufacturing purchasing managers’ index rose from 55.8 in March to 57.3 in April. Numbers over 50 indicate activity is increasing. It was one of the best results since 2010, just before UK manufacturing slipped into a double-dip recession.

Respondents to the Markit survey said they were busy dealing with new orders, product launches and backlogs of work. New orders came from the UK and from overseas and activity increased in the consumer, intermediate and investment goods sectors.

The PMI figures add to a string of robust data this week indicating UK economic growth is broadening.

First-quarter gross domestic product rose 0.8 per cent, once more outpacing its G7 counterparts, and far outstripping that of the US, where bad weather and disappointing exports and investment dragged the world’s largest economy to an annualised 0.1 per cent pace of GDP growth.

Rob Wood, chief UK economist at Berenberg Bank, said there was “absolutely no sign” UK growth was slowing down – “to the contrary, it is probably accelerating”.

Yet the positive economic news has been overshadowed by warnings from two senior Bank of England policy makers in the past two days about the rapid recovery in the housing market and its risks to financial stability.

Their warnings come after notable rises in house prices and gross mortgage lending over the past year.

However, there were tentative signs in official BoE data on Thursday of a slight slowdown in the market.

Its numbers showed the second consecutive monthly fall in the number of mortgage approvals. This follows Land Registry data published this week showing a small monthly fall in house prices in March.

David Tinsley, UK economist at BNP Paribas, said the fall in mortgage approvals, “may suggest some reduction in the pace of the upswing in the housing market in coming months, which would assuage anxiety that the recovery is too lopsided”.


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Sir Jon Cunliffe, a deputy governor at the central bank, acknowledged these signs in his speech on Thursday night, but warned against reading too much into them.

“The very latest figures for March . . . could suggest a pause in the growth in prices and activity,” he said. “But just as one cuckoo does not signal spring, it is far too early to say, on a couple of months’ figures, whether this is the beginning of a turning point in the market.”

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Price indices have presented wildly contrasting pictures of the health of the housing market – according to some the boom is back, while to others the slump staggers on

The BoE is hoping the fall in approvals is a sign lenders tightened criteria in response to the introduction of the mortgage market review, which imposed much tougher affordability tests on borrowers.

Data from the Council of Mortgage Lenders also suggested efforts to reduce the number of interest-only mortgages in the UK – which a few years ago regulators warned could be a “ticking time bomb” – are working. It said that over the past year there has been a 12 per cent fall in the number of outstanding interest-only mortgages.

Meanwhile, the BoE’s figures showed unsecured consumer credit rose to an 18-month high of £1.1bn, because of an increase in loans and overdrafts.

Jonathan Loynes, chief European Economist at Capital Economics, said this was a sign that the “relatively creditless” consumer recovery was beginning to change.

“With real wages finally on the rise and confidence building, we expect the demand for credit to grow over the coming months,” he said.


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