Saturday, July 4, 2009

Home equity withdrawal in the UK: dragging consumption flow

The housing market creates a lot of economic momentum. Explicitly, residential construction (part of the I in Y = C + I + G + NX) contributes to GDP, but there are all sorts of implicit positives as well via consumption.
  • Buying a home leads to increased spending on household items, furniture, traveling expenses, etc.
  • Appreciation of a home's value leads to positive wealth effects on consumption.
  • Home-price appreciation increases the value of the collateral held on a mortgage. The owner of that collateral can refinance the mortgage on the new value of the home, which facilitates new consumption via home equity withdrawal.
The Bank of England just published statistics on home equity withdrawal activity. As in the US (you can see the data here at the Fed's flow of funds accounts, table L.218), UK home equity lending is negative. The negative number implies that in the aggregate, households are not taking out home equity lines of credit, rather paying down the mortgage (making the required monthly payments, principal plus interest, or increasing the principal payments).

The chart illustrates home equity withdrawal as a % of disposable income and consumption growth in the UK. As recently as Q1 2008, home equity withdrawal was very positive, 2.9% of disposable income.

There is a positive correlation between home equity withdrawal and consumption growth, 0.3 over the sample; consumers usually spend home equity lines of credit directly (do work on the home, take a vacation, etc.), or indirectly via paying down other types of debt (auto loans, credit cards, etc.). Obviously, home equity lines of credit do not determine consumption in full - other factors, like the labor income, is more important in forecasting aggregate consumption. However, the lack of home equity withdrawal drags the flow of consumption.

McKinsey & Company (register for free to view the article) did some nice research on debt-fueled consumption (partially by home equity lending) in the US, and I remember reading a quality post at Calculated Risk on the subject.

Rebecca Wilder

1 comment:

  1. Hi Rebecaa,

    Where can we find data on home equity withdrawal in the US please?


    Dirk Bezemer