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  4. Market downturn has reduced equity withdrawal, says Bank

Market downturn has reduced equity withdrawal, says Bank


Published: 14 December 2011 | Author: Bernard Clarke

Households injected more than £9 billion into their home-ownership in the second quarter of this year – the largest amount ever reported. Data published by the Bank of England shows that almost £93 billion has been injected since the second quarter of 2008, when the market downturn began to have an impact.

Some commentators have interpreted this data as an indication that households have responded to the financial crisis by actively seeking to pay down mortgage debt. What it really shows, however, is that a decline in the number of housing transactions (and low levels of new mortgage lending) have led households to withdraw significantly less equity than we have ever seen before.

A recent piece of analysis by the Bank concluded that "the fall in the number of housing transactions is…likely to have been a key driver of the fall in equity withdrawal since the financial crisis."

The Bank’s data showed that housing equity withdrawal had swung from being "significantly positive" before the financial crisis and recession to negative from the second quarter of 2008. It concluded: "There is little sign that, at aggregate level, households are making an active effort to pay down debt more quickly than in the past."

Before 2008, the Bank’s data had not shown households injecting housing equity since the 1990s.

The financial crisis was associated with a sharp tightening in the availability of credit, a fall in house prices and a decline in the number of housing market transactions to around half of pre-crisis levels. The Bank argues that each of these affects withdrawal of housing equity:

  • Housing chains usually mean that overall there is a large equity withdrawal. This is because the modest amount of equity injected by the size of deposit paid the buyer at the start of a chain – often a first-time buyer – is typically dwarfed by equity withdrawn by a seller at the end of the chain, who does not purchase another property. A decline in housing transactions has reduced the number of chains, thereby reducing equity withdrawal.
  • Lower house prices have also reduced the capacity of households to withdraw equity as part of the transaction process, with the Bank estimating that house prices have fallen by 13% since 2007.
  • Tighter credit conditions have also reduced the potential for households to draw on housing equity.  Additionally, the financial crisis has made households more cautious about drawing on housing wealth, as they view equity less as a means of funding consumption and more as a buffer against which they could potentially draw if they experience a fall in income.

In contrast, the four main sources by which households inject equity – regular and lump sum mortgage repayments, property improvements and deposits paid by first-time buyers or buy-to-let investors – have declined to a much lesser extent in the aftermath of the financial crisis.

Regular mortgage repayments have held up well during the downturn, as Chart One shows, while lump sum payments and injections through property improvements have declined – but only relatively modestly. Injections of equity by first-time buyer and buy-to-let investors have fallen to a greater extent, but they formed only a relatively small proportion of overall equity injection even before the market downturn.

Chart One: Percentage of mortgage balances repaid through regular and lump sum payments

Source: CML/Bank of England

The Bank concluded that a reduced number of home-owners trading down and selling a property without buying another meant that a large source of equity withdrawal had disappeared. Meanwhile, flows of equity injection over the same period had changed little. "So, the move to injections does not, by itself, suggest that the household sector, as a whole, is paying down debt more rapidly than in the past," the Bank said.