Global| Jul 06 2006Mortgage Equity Withdrawal Stages Partial Recovery in Both US and UK; UK House Prices Moderating
Summary
Mortgage equity withdrawal in the UK picked up in Q1, according to data reported today by the Bank of England. It came to £12,509 million, up from £12,121 million in Q4 and £6,478 million in the year-ago period. The Bank of England [...]
Mortgage equity withdrawal in the UK picked up in Q1, according to data reported today by the Bank of England. It came to £12,509 million, up from £12,121 million in Q4 and £6,478 million in the year-ago period. The Bank of England originated this concept about five years ago and gave it the name "mortgage equity withdrawal". It represents the borrowing by consumers on their homes which exceeds the amount necessary to finance the investment in the house itself. Because of recent strength in home prices over construction values, homeowners have considerable equity, and they have been leveraging that toward any number of unrelated purchases. This borrowing in the UK was equivalent to 5.8% of consumers' post-tax income in Q1. In 2003 and 2004, house prices were stronger and mortgage equity withdrawal was greater; 2003 was the peak year, with a total of £57,233 million, a quarterly average of £14,308 million and 7.5% of consumer income. [The relationship of MEW to HBOS (Halifax) house prices, which were also reported today through June, can be seen in the first graph.]
As we have discussed here previously, the same phenomenon has been occurring in the US, and we are struck by -- indeed, amazed -- at the similarity in the trends of this practice in each country. The volume of what we prefer to call "home equity withdrawal" also increased in Q1, recovering to $664.3 billion after falling in Q4 2005 to $619.3 billion. The peak quarter was $712.0 billion in Q3 2005. The series we cite is calculated by Haver, based on the value of residential investment by households, including improvements. [The Fed calculates a series based on the value of home sales and does not cover funding of improvements.] The Haver data, our series MEW1, equaled 7.2% of disposable income in Q1, compared with 6.7% in Q4 and 7.9% in Q3. 2005 was the big year for home equity withdrawal in the US, as easily noted in the accompanying graphs.
Comparing the trends in the UK and the US, we see in the second graph, there is an extraordinary 87% correlation between equity withdrawal in the two countries. The period of softness in the mid-1990s, with modest equity buildup (that is, negative MEW), was repeated in both economies. But MEW grew rapidly in both places in the late 1990s. The patterns diverge a bit in 2003, but continue to tell essentially the same story of homeowners' significant borrowing on their homes to finance other activity. The final graph shows a 66% correlation in the ratios of this borrowing to disposable income in each country, augmenting income resources by some 6% in recent years. Now housing markets are moderating in both countries, with a flattening or notable slowing of price gains and some hesitancy in sales. So it remains to be seen how MEW will behave in both the UK and the US and what the implications of that will be for consumer spending.
| Q1 2006 | Q4 2005 | Q3 2005 | Year Ago | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|---|---|
| UK: Mortgage Equity Withdrawal(Bil. £) | £12.5 | £12.1 | £9.2 | £6.5 | £9.5 | £12.4 | £14.3 |
| % of Post-Tax Income | 5.8% | 5.7% | 4.4% | 3.2% | 4.6% | 6.3% | 7.5% |
| HBOS House Price (000s £) | June 2006 | May 2006 | Apr 2006 | £163.0 | £165.4 | £157.0 | £132.2 |
| £176.5 | £178.7 | £178.9 | |||||
| Yr/Yr % Change | 8.2% | 10.0% | 9.9% | -- | 5.3% | 18.8% | 19.0% |
| US: Home Equity Withdrawal(Bil. $) | Q1 2006 | Q4 2005 | Q3 2005 | $429.1 | $591.3 | $475.2 | $451.8 |
| $664.3 | $619.3 | $712.0 | |||||
| % of Disp. Income | 7.2% | 6.7% | 7.9% | 4.8% | 6.5% | 5.5% | 5.5% |
Carol Stone, CBE
AuthorMore in Author Profile »Carol Stone, CBE came to Haver Analytics in 2003 following more than 35 years as a financial market economist at major Wall Street financial institutions, most especially Merrill Lynch and Nomura Securities. She has broad experience in analysis and forecasting of flow-of-funds accounts, the federal budget and Federal Reserve operations. At Nomura Securites, among other duties, she developed various indicator forecasting tools and edited a daily global publication produced in London and New York for readers in Tokyo. At Haver Analytics, Carol is a member of the Research Department, aiding database managers with research and documentation efforts, as well as posting commentary on select economic reports. In addition, she conducts Ways-of-the-World, a blog on economic issues for an Episcopal-Church-affiliated website, The Geranium Farm. During her career, Carol served as an officer of the Money Marketeers and the Downtown Economists Club. She has a PhD from NYU's Stern School of Business. She lives in Brooklyn, New York, and has a weekend home on Long Island.
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