Friday, 3 July 2009

The great mortgage payback continues

Here is another reason why first quarter GDP turned violently negative. Home owners paid back record amounts of their home equity and mortgage loans. During the first three months of this year, the payback amounted to 3.5 percent of post tax income. A cool ₤8 billion was repaid to the banks.

Before the crash, home equity withdrawal was the engine of the UK economy. House prices went up, home equity increased and banks handed out loans to anyone who owned a home. These loans financed a consumption binge which kept taxes high and the rest of us in employment.

House prices are again picking up, and as they do, home owners gain equity, allowing them to take out loans. If prices fully recover, then the bubble back on. Banks can turn the tap back on and we can return to the good old days of asset appreciation and a consumption loaded lifestyle built on debt.

Bring it on; I can't wait.


Markbaldy said...

If that happens Gordon Brown WILL get re-elected... after all HE was the one that made all home-owners wealthy wasn't he...
The amount of debt will be quickly swept under the carpet and the "spend now pay never" culture will carry on as if the recession never happened... and that whining cow Kirstie Allsop will be back on the tele selling £500K former council houses to young married couples with 3 kids and a new BMW... all on borrowed money of course !

deepian said...

it won't happen: the deflationary pressures are too huge and the false confidence that fueled the bubble has now deflated - anyway, how can the zombie banks start lending again when they need more cash than they can get just to fire fight their mounting bad debts?

Anonymous said...

Engineering a bubble boom in one country (the UK) won't work for some fundamental reasons. While it is possible to juice and distort the UK real estate market, the money generated from inflated mortgages still needs to go somewhere. It normally is invested overseas. And usually to reap benefits from the US consumer. But the US consumer is bust and not coming back for at least a decade. As for the BRIC consumer, those countries still need to make the adjustment from export market dependency to domestic consumption. It will take time.