Monday, 12 November 2007

Living on borrowed time

Looking at the US economy today is like looking into our future. Over there, house prices are tumbling, and credit markets are seizing up. Although house prices here have yet to start correcting, it is definitely getting much harder to borrow.

Today, I read a couple of numbers today that emphasized just how far things spun out of control in the US.

  • From 2004 – 2006 Americans pulled $840 billion a year out of residential real estate; to give that number some perspective that an amount large enough to be the world’s 14th largest economy on a GDP basis.
  • The housing ATM financed $310 billion/yr worth of personal consumption from 2004-06.
  • A year ago, money taken out of homes was equivalent to about 9 percent of total personal income, now the number is down to around 5 percent. A 2 percent drop in consumer spending is enough to send the nation into a recession.
  • In 2006 20 percent of the personal consumption spending in California and Nevada was financed by home equity loans it’s now down to 9 percent.
The scary thing, however, is that in the UK, personal sector indebtedness is even more strained than in the US. Ever get the feeling that we are living on borrowed time?


Patrick said...

Using the Bank of England's figures, available here, we can see that the UK underwent a similar decline in mortgage equity withdrawal:

2003 Q4 -- 8.8% £17.16 billion
2005 Q1 -- 3.0% £6.06 billion

(% figure is MEW as a % of post-tax income)

There was no housing market crash then, although interest rates were still low. MEW for the UK is currently at 6.0% or £13.2 billion (2007 Q1).

Large declines in MEW, of themselves, may not lead to recessions. Something more is needed.

Anonymous said...

You forgot that in the USA we pay about a 40% tax on earning. Take that MEW and multiply by 1.4 that is its equivalent taxable value compared to a salary.