So house prices are falling, but does it matter? Clearly it matters if you are looking to downsize, or you were hoping to use the equity in your house as a kind of pension. But will consumers really spend less because house prices are falling?
The Bank of England doesn’t seem to think it matters too much. When prices were going up, it was pretty relaxed about it. Sure there was an increase in the number of equity withdrawals, but the bank used to say the money was used to buy assets, or pay off other debt, so it was not a cause for concern.
For that matter, it has managed to produce some analytical evidence to suggest consumer spending and house prices are not correlated. Earlier this decade, when house prices went up, consumer spending did not rise so fast, ergo went the conclusion, there is no link.
More recently, it has said that there is so much spare equity in our housing stock, that even if house prices were to fall 10 or even 15 per cent, most home owners would still have a lot of spare equity in their home.
According to a recent report in the FT, if house prices fell 15 per cent, only half a million homes would be worth less than the mortgage issued against them. Even if house prices fell 20 per cent, there would be 1.2 million households with negative equity. In fact, calculated the FT, prices would need to fall by almost 30 per cent for negative equity numbers to reach 2 million.
And yet, explain this. During the first quarter of this year, house equity withdrawals fell from £7.4bn in the last quarter of last year to £5.0bn in Q1, so says recent data from the Bank of England.
To put this in context, at the beginning of last year, house equity withdrawals accounted for around 6.5 per cent of disposable income; in the first quarter of this year they were down to just 2.3 per cent of disposable income.
Furthermore, Capital Economics reckons that by next year house equity withdrawals will fall to zero.
Vicky Redwood, from Capital Economics said: “Admittedly, the impact of falling equity withdrawal on the wider economy is limited by the fact that not all of it is spent. Equity withdrawal includes the money released by last-time sellers exiting the housing market, who are likely to put the money straight onto deposit. Nonetheless, even if only one fifth of withdrawn equity is spent, Q1’s fall would have shaved £0.5bn off households’ spending power, the equivalent of 0.2 per cent of household income. While not a huge amount, this is hardly helpful when income growth is already so weak.
“We therefore continue to think that the housing slowdown will have a direct impact on consumer spending, in part through the resulting fall in equity withdrawal.”
It has long been a puzzle to us as to why the Bank of England does not believe there is a link. The data might suggest there is no correlation, but common sense says there is.
As was said by a reader on our blog, maybe the chiefs at the Bank of England are just too out of touch with how ordinary people behave.
If your house is going up in value, you are that little bit more willing to take a risk. To put money on your credit card, that you really shouldn’t be spending, but “hey, my house has gone up by £100,00 this year, so who cares if I spend a couple of grand more than I should?”
The most likely explanation for the breakdown in correlation earlier this decade is this: Consumer spending hit unsustainable levels in the late 1990s. It should have crashed. But rising house prices stopped this from happening.
The next year or so will show who is right.
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