Consumer crisis makes British keen to pay off mortgages

Britons injected more equity into the housing market in the third quarter of this year than at any time since records began in 1970, Bank of England figures showed.

The figures highlight the extent to which credit is being restricted and will put further downward pressure on consumer spending.

Households injected a net £5.695 billion into the housing market between July and September, the equivalent of 2.4 per cent of post-tax income, after injecting £1.951 billion in the previous three months.

Housing equity withdrawal has provided a significant prop to consumer spending in recent years as rising house prices encouraged Britons to refinance home loans to free up cash for other purposes.

In the third quarter of last year, housing equity withdrawal totalled more than £11 billion, or 4.8 per cent of post-tax income.

"With the taps now turned off on mortgage equity withdrawal, the emphasis of consumer spending is going to rely more heavily on take-home pay growth," said Alan Clarke, an economist at BNP Paribas. "Unfortunately, with unemployment likely to shoot higher and earnings growth likely to slow, disposable income isn't going to look that great."

The last time housing equity withdrawal registered two consecutive negative readings was in 1998 when the equity injection amounted to 0.2 per cent of post tax income.

With house price falls showing no sign of abating and interest rates at historically low levels, housing equity withdrawal is unlikely to pick up for some time.

House prices in Britain have fallen about 15 per cent over the past year and leading property analysts are forecasting a double-digit decline this year as well.

"Sharply falling house prices have made housing equity withdrawal increasingly unattractive, while very tight credit conditions have made it more difficult to do," said Howard Archer at Global Insight. "In addition, increasingly lower savings rates have made it relatively more attractive for many people to use any spare funds that they have to reduce their mortgages."