(Click on the chart for a larger image).
Homeowners are still at it; they are still pulling out cash from their homes using mortgage equity loans. During the third quarter of 2007, homeowners borrowed £10.5 billion, taking the 12 month total up to £47 billion.
Currently, mortgage equity withdrawal represents almost 5 percent of disposable income. This huge expansion of personal debt is propping up UK consumption expenditure and ultimately economic growth.
But will it continue? Not if house prices slow. A crash wipes out equity and when the equity evaporates, so do the loans. This means that the housing crash will feed directly into lower consumption and accelerate the UK's slide into recession.
4 comments:
So it is still "spend, spend, spend"
I don't know the UK banks work it, but in the US the economy has been supported by home equity withdrawals--and once house prices start falling below the original value, people cannot withdraw more equity. In the US banks and lenders have already drawn a line: home quity loans have dried up. Expect the same to happen here very soon.
I am very surprised it lasted this long actually... I had predicted that a credit crunch/house price crash would have occurred 2 or 3 years ago.
It was obvious to me that people were having lifestyles that far exceeded what they were actually earning and that is just not sustainable is it.
I am angry that the government and BOE are bending over backwards (it would seem) to bail out those that have borrowed (some with no intention or abilty to pay any of it back) and penalised prudent people like myself (ie savers and those that live inside their means)
Isn't the effect of disappearing MEWs doubled? All those retailers have expanded into the boom to allow for this 7-10% per year extra spending fuelled by MEW. Not only does this disappear in 2008 but the debt rollover comes to a halt so 2008 and 2009's income is spent repaying the debt on 2004-2007's spending, rather than on 2008 spending.
MEW is a misnomer because it's a loan secured on equity. It's not a equity withdrawal unless you sell the house at or above the refinanced limit. If you can't sell, you've got to pay that loan with income.
nick
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