Here is where the credit crunch really bears down on consumption expenditure and economic growth. The credit cruch is killing off home equity withdrawal.
The chain of consequences starts with the collapse of interbank credit. Banks have insufficient funds and can not provide mortgages. The lack of housing credit kicks away homebuyer demand. House prices fall, and home equity evaporates. Without home equity, there can be no home equity withdrawal.
The really shocking thing about home equity is the magnitude of the outflows over the last ten years. At the height of the bubble, UK homeowners were taking out 8 percent of post tax income. That is an extraordinary number.
This points to three interesting observations about how the housing bubble worked. First, as my previous post suggests, the actual number of houses changing hands was comparatively low, and certainly far lower than the previous bubble in the 1980s. Second, gross mortgage lending was increasing at double digit rates. On the face of it, it is hard to reconcile these two observations.
The home equity money foundation is the third observation than squares everything away. Existing homeowners didn't need to sell their home to withdraw equity. All they needed to do was remortgage or take out a home equity loan.
This is what fueled our debt-manufactured economic boom. In retrospect, it seems obvious that it could not go on, and that it would conjure up a string of nasty problems like insolvent banks, higher inflation and a crushing external deficit.
Well, it is over now. Today, we are in a post-bubble credit crunched world. All that is left to do is clean up the mess and separate the winners from the losers.