mortgage equity withdrawal
The Bank of England's estimate of mortgage equity withdrawal (MEW) is intended to measure that part of consumer borrowing from mortgage lenders that is not invested in the housing market. It takes the increase in housing finance (net mortgage lending and capital grants) and subtracts households’ investment in housing (purchases of new houses and houses from other sectors, improvements to property, and the transactions costs of moving house).
Equity withdrawal is potentially a very importance source for finance for general consumer spending. It basically means that home owners are borrowing some of the capital gains from their property and then turning this into liquid spending power by taking out additional housing equity loans.
Housing boom of the late 1980s
Over a decade ago, house prices soared and millions of people were confident enough that prices would continue higher in order to borrow some of the profit locked into their properties. As the chart below shows, the seasonally adjusted level of mortgage equity withdrawal reached very high levels - much of it finding its way into the hands of Uk retailers an importers. Mortgage equity loans were a major factor behind the consumer boom of 1987-88.
From Boom to Bust
The collapse in the housing market led to a sharp fall in mortgage equity withdrawal - and for several years this type of lending was very much in the doldrums. Over 1.5 million homeowners found that they were in negative equity in 1993 - a situation where the market value of their property was less than the outstanding mortgage loan. Little wonder that the early-mid 1990s were times of subdued consumer demand for goods and services. Rebuilding savings and re-paying large chunks of the accumulated debt was the order of the day. This is shown in the chart above by the negative figures for equity withdrawal.
Rising house prices - the return of mortgage equity withdrawal
In the last two years the sustained (and rapid) growth of house prices in many regions of the UK has seen a return to positive equity or hundreds of thousands of home owners. Eventually we expected to see a rebound in equity withdrawal and as both charts on this page show, this has now occurred. The data is taken from information published by the Bank of England.
With interest rates remaining low and house prices continuing to rise by more than 5% per year, there is every reason to expect continued high levels of mortgage equity lending - although not on the same scale as a decade ago. This extra lending will provide support for total consumer demand for goods and services throughout the economy. It would take a major downturn in the Uk housing market for the picture to change - the economic fundamentals remain fairly positive for the housing sector at the moment. By August 2001, mortgage interest rates had fallen to a forty year low - providing another fillip for home-buyers.
Update: October 2001
Mortgage equity withdrawal represents secured borrowing by homeowners against the value of their house to finance their consumption. In the second quarter of 2001 (covering the period from April through to the end of June), homeowners borrowed more than £5 bn by re-mortgaging their homes. This is a £1.6 bn jump in equity withdrawal compared to the first three months of the year and the highest scale of borrowing since autumn 1988 - when housing market was reaching the peak of its sustainable boom. Measured as a proportion of income equity withdrawal climbed to 2.9 per cent - well above the levels seen for most of the 1990s (a source of concern for the Bank of England) - but well below the peaks scaled in the late 1980s.
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