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Why I’m Bullish On Lloyds Banking Group PLC

Like it or not, the fortunes of the UK economy are closely tied to the performance of the housing market.

When house prices go up, people feel richer and spend a little bit more. Similarly, when house prices fall, people feel poorer and hold off on buying, for instance, a new car or new sofa.

This fact doesn’t always make sense to me. Certainly, if the value of your house has gone up then, in theory, you are richer because you have a larger amount of equity. However, on a relative basis you are no better off.

In other words, if you were to sell your house and move to another one, you would not be able to buy a significantly better house in a substantially better area because the prices of those houses would also have gone up, making you no better off.

Whether I understand it or not, it doesn’t matter. House price increases are good for the UK economy.

So, I was encouraged by recent data showing that mortgage lending surged to its highest level in over five years.

Indeed, the Council of Mortgage Lenders, a trade body, said that gross mortgage lending increased to £16.6 billion in July. This is an increase of around 12% since June and is the highest figure since October 2008. Furthermore, it is 25% higher than was forecast for July.

Of course, lending still remains below its pre-credit crunch level, but the news is nonetheless very encouraging. Increased lending means increased demand for property, causing house prices to (in theory) head northwards.

One stock through which I hope to benefit from any upturn in the housing market is Lloyds (LSE: LLOY) (NYSE: LYG.US), which has vast swathes of UK mortgages from when it was apparently forced to acquire HBOS in 2008. This has undoubtedly held back shares in recent years, as market sentiment was poor and the company was trying to begin the long process of turning itself around.

However, with the comeback now on, I believe that Lloyds is an attractive investment. Not only is it on the verge of returning to profitability (according to forecasts) but it is aiming to pay out up to 70% of earnings as dividends within three years. For income-seeking investors like me, this could prove to be a real boost to my portfolio, with inflation being a concern and low bank savings rates causing me a headache.

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> Peter owns shares in Lloyds.