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Economy in Brief

Mortgage Equity Withdrawal Stages Partial Recovery in Both US and UK; UK House Prices Moderating
by Carol Stone July 6, 2006

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%
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