Consumers not paying down mortgage debt faster, says BoE

The decrease in housing equity withdrawal over the last few years is down to a fall in the number of housing transactions since the credit crunch, rather than households paying down debt more quickly than in the past, according to the Bank of England’s latest Quarterly Bulletin.

In an article in the bulletin, Kate Reinold of the Bank’s Structural Economic Analysis Division says that HEW has swung from being significantly positive before the financial crisis to negative since 2008.

She explains that the stock of housing equity is the portion of housing wealth that does not have lending secured on it, and this can alter through changes in the stock of secured lending when households take out or repay debt, changes in the stock of housing wealth when new properties are built or improvements made to existing properties, and from changes in house prices.

HEW turned negative in 2008 for the first time since the 1990s, signifying that the household sector was injecting equity into housing after a long period of withdrawals.

But Reinold says that while it may be tempting to interpret this as an active effort by households to pay down debt more rapidly than in the past, it is not clear that this is the case.

Instead, she goes on to explain that movements in HEW are closely related to turnover in the housing market, as the net effect of a housing chain is typically a large equity withdrawal, which will be larger still if house prices are high.

Therefore, Reinold says that the sharp tightening in credit availability, fall in house prices and fall in housing market transactions associated with the financial crisis have all led to a drop in equity withdrawals.

She says: “While withdrawals have fallen sharply since the crisis, injections have been little changed. This suggests that, as a whole, the household sector has not been actively paying down debt more quickly than in the past (although some individuals may have been).

“This is consistent with intelligence from the major UK lenders that there had not been widespread overpayments of mortgages in 2010.”

Reinold concludes by saying that weak housing market transactions are likely to have been the key driver of the move from equity withdrawals to equity injections.

She adds: “Fewer homeowners trading down and selling a property without buying another mean that a large source of equity withdrawal has disappeared.

“Flows of injections have changed little over the period, 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.”