Housing Equity Withdrawal, or HEW for short, is new borrowing that is secured against property which is not reinvested in the housing market. In other words, it is borrowed money that is not used by households to purchase property or to undertake major refurbishments, such as extensions to existing residential properties. The latest HEW statistical release from the Bank of England shows that HEW in Q4 2009 was again negative, making it the seventh consecutive quarter of negative HEW. But, what does a negative HEW figure mean?
Negative HEW occurs when the total saving by households in housing (either by paying back mortgages or by purchasing property directly without borrowing) is greater than new borrowing secured against housing. It results in an increase in housing equity held by the household sector. In the fourth quarter of 2009, the Bank’s seasonally-adjusted figures show that negative HEW was just over £4.3 billion, equivalent to 1.6% of disposable income.
But why might the household sector have wanted to save through housing and how might this impact on consumer spending? In truth there is no single reason, but one potentially important reason is likely to be the sector’s desire to rebuild its balance sheets. In times of uncertainty, such as those that we face now, a perfectly understandable response by households is to try to reduce their exposure to debt. During the seven quarters in which HEW has been negative, households have used housing as a vehicle for saving to the tune of £36.5 billion, equivalent to 2.2% of the sector’s disposable income. To some extent the fact that, as a result of the banking crisis, house-buyers have had to put down larger deposits when purchasing housing helps to reduce their exposure to debt. But, the extent of the negativity of HEW means that households more generally have been actively looking to repay some of their outstanding mortgage debt.
So what of the impact of HEW on consumer spending? Negative sums of HEW mean that consumers are either reducing consumer spending, reducing holdings of financial assets, increasing levels of unsecured debt (e.g. personal loans or credit card debt) or, of course, undertaking some combination of these. Given that the stock of unsecured debt has actually declined by £7.9 billion to £224.8 billion in the 12 months to February, the impact would seem to be falling on consumer spending.
Some commentators are pointing to the weakening pace with which households are saving through housing. The current level of saving through housing is, as we said earlier, equivalent to 1.6% of disposable income, down from the 3.0% recorded in both Q4 2008 and Q1 2009. But, this would seem to simply highlight the extent of the precautionary behaviour by households in the midst of the economic downturn. It would be a surprise to see any significant end soon to the UK household sector’s precautionary behaviour.
Articles
Britons plough cash into repaying debt The Times, James Charles (6/4/10)
The great mortgage payback Reuters, Harry Wallop (6/4/10)
Home owners’ housing equity still increasing BBC News (6/4/10) )
Brits pay off £4bn of mortgage debt Press Association (6/4/10)
UK Q4 housing injection smallest since Q2 2008 – BOE MarketNews.com (6/4/10)
Data
Housing equity withdrawal (HEW) statistical releases Bank of England
Questions
- Explain what are meant by positive and negative values of HEW.
- What implications might additions to housing equity have for consumer spending?
- What factors do you think lie behind the seven consecutive quarters of negative HEW?
- If house price inflation were to start picking up in the near future, would you expect to see positive values of HEW and, if so, how strongly positive?
- Other than through HEW, how might the housing and mortgage markets impact on consumer spending?
An important measure of activity in the housing market is the number of mortgage approvals. Figures released by the Bank of England show that the number of mortgage approvals for house purchase, after seasonal adjustment, fell from 48,099 in January to 47,094 in February. This was the third consecutive monthly fall in the number of mortgage approvals and the lowest number since the 46,551 recorded back in May 2009.
If we take the latest three months as a whole (December 2009 to February 2010), there were 153,446 approvals worth £20.89 billion. Now, when compared with the same three months a year earlier we can see just how thin activity in the housing market was back then: the number of approvals is now 45.2% higher, while the value of approvals is 30.8% higher. But, it is short-term growth or, more accurately, the lack of it which is worrying commentators. It appears that much of the autumnal recovery in housing market activity is petering out. When we compare the figures for latest three months with those in the previous three months (September to November 2009) we find approval numbers down 10.7%, while the value of approvals is down 11.4%. In other words, it appears that housing demand is again weakening.
If we take a slightly longer-term perspective it becomes even clearer just how low, by historic standards, current activity levels are. Over the past ten years the average number of mortgage approvals for house purchase each month has been 94,443 – this is more than double the number reported for February. So, while the clocks may have gone forward, mortgage approvals are reluctant to move forward. But, more than this, it will be fascinating to watch in the months ahead the patterns in mortgage approvals and so monitor the demand for housing.
Articles
Mortgage lending falls to a nine-month low Times Online , Robert Lindsay (29/3/10)
Mortgage slowdown continues, Bank of England data shows BBC News (29/3/10)
Mortgage approvals fall to a nine-month low Financial Times, Daniel Pimlott (29/3/10)
BoE reports fall in February mortgage approvals Home Move, Kay Murchie (29/3/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- Between September 2008 and the end of 2009, the government introduced what became known as a ‘Stamp Duty holiday’. This meant that buyers became liable to pay Stamp Duty (a tax on house purchases) on property purchases worth over £175,000 rather than over £125,000. How would you have expected the ‘Stamp Duty holiday’ to have affected activity levels during this period? And what types of buyers would have most benefited?
- The government announced in the March 2010 Budget that it is removing Stamp Duty for first-time buyers on properties up to £250,000 for a 2-year period starting from 25th March 2010. What impact might this have on current activity levels? What about in the run-up to its removal in 2012?
- In the March 2010 Budget, the government announced that a 5% rate of Stamp Duty was being introduced on properties of over £1 million from tax year 2011-12. Currently, a top rate of 4% is applied to properties over £500,000. How would you expect this to affect activity levels now, the closer we get to next April and then after April 2011?
- What can we infer from the recent patterns in mortgage approvals about the strength of housing demand?
- Do patterns in the number of mortgage approvals have implications for house prices? Explain your answer.
One measure of the level of activity in the housing market is the number of mortgage approvals for house purchase. While a small number of approvals will not result in transactions because house purchases can ‘fall through’, the current number of approvals is, nonetheless, an extremely good guide to transaction levels in the near future. The seasonally-adjusted approval number for January 2010 reported by the Bank of England was 48,198. This has drawn a fair amount of attention because it was the lowest since May last year and it was the second monthly fall in a row.
The increase in mortgage approval numbers seen in the second half of last year represented an increase in housing demand and helps in understanding why house prices rose over the same period. But, we should perhaps put January’s approval figure into further context. 2008 saw mortgage approval numbers collapse to only 451,350 (or roughly 37,600 per month) from 1,323,609 (or roughly 110,300 per month) in 2007. The average monthly number of approvals across the last decade was 95,000 – roughly double January’s number.
So what a trawl through the figures shows is that the current level of approvals is by historic standards low, but still above the incredibly low levels seen during 2008. But, more than this, it suggests that we perhaps need to get accustomed to relatively low mortgage approval numbers. With financial institutions and households alike needing to remain cautious and rebuild their respective financial positions, we should expect ‘new norms’, so far as activity levels are concerned, for quite some time to come.
Articles
UK mortgage approvals fall for second month in January: BOE RTT News (1/3/10)
Mortgage approvals drop sharply BBC News (1/3/10)
UK mortgage approvals drop to eight-month low Bloomberg.com, Scott Hamilton (1/3/10)
Mortgage lending dives after end of stamp duty holiday Independent on Sunday, James Thompson (14/3/10)
Housing market turnover falls despite record low rates on new mortgages Financial Times, Norma Cohen (13/3/10)
Fears grow that new mortgage drought could hit house prices Times Online, James Charles (13/3/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What factors do you think will have contributed to the fall in mortgage approvals in 2008? And what factors might explain the slight recovery in the second half of 2009?
- What factors do you think will be important in determining mortgage approvals in the months ahead?
- How might changes in the number of mortgage approvals be expected to affect house prices?
- What role might financial institutions, like banks and building societies, play in affecting UK house price growth in 2010? How might their influence compare with that in the period 2008/9?
The winter months traditionally see lower house sales and prices tend to remain steady or fall. However, house prices had continued to increase over Christmas, as the stamp duty holiday came to an end. In a bid to boost the housing market, the stamp duty threshold had been pushed up from £125,000 to £175,000 for just over a year. This seemed to work, as the housing market did rally throughout 2009 and in particular, in the final months of 2009. Mortgage approvals increased, as first-time buyers in particular tried to complete before stamp duty fell back to £125,000.
However, the end of this ‘holiday’, combined with the icy conditions experienced throughout the UK were contributing factors in the first decline in house prices in about 9 months. According to Halifax, house prices in February fell by 1.5%. House prices are still higher that they were 9 months ago, but the upward momentum they did have, has now taken a dive. Mortgage lending was also down in January by about 32%.
Another factor that has contributed to this downturn is the increased number of properties on the market. Throughout 2009, the number of properties for sale was relatively low and as such, ‘Sale agreed’ notices were appearing on properties within days of them being for sale. This imbalance between demand and supply is now beginning to even out. Is this downward trend merely a blip or does it spell further trouble for the UK economy?
Articles
Snow and end of stamp duty holiday leads to first property price decrease in the UK for nine months PropertyWire (1/3/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Mortage lending slump prediction comes true as stamp duty returns Daily Mail Online (23/2/10)
House price ‘lose momentum’, says Nationwide BBC News (26/2/10)
Snow and tax send house prices down 1.5% (including video) Times Online, Francesca Steele (4/3/10)
UK house prices fall, snapping rally Telegraph (4/3/10)
House prices fall in February Guardian, Hilary Osborne (4/3/10)
Data
For the Halifax data, see
Halifax house Price Index, February 2010
See also Lloyds Banking Group Housing Research home page and in particular the Historical House price Data link
Questions
- What is stamp duty and how did an increase in the threshold aim to stimulate the housing market? Can this be illustrated diagramatically?
- Illustrate how house prices are determined using a demand and supply diagram.
- One factor that had caused house prices to rise was a lack of supply. Show this on your diagram. Are there any factors that make price fluctuations even more severe, following changes in the demand and supply of houses?
- Illustrate how the imbalance of demand and supply has begun to even out.
- Why is the state of the housing market such an important factor in determining the strength of the economy?
- How do interest rates affect the housing market? Think about the impact on mortgages. Why have mortgage approvals fallen?
- To what extent has the weather contributed to falling house prices?
In several of the posts in recent months we’ve considered the possible use of a Tobin tax as a means of reducing speculation in financial markets and possibly raising substantial amounts in tax revenue. See, for example: Tobin or not Tobin: the tax proposal that keeps reappearing and A Tobin tax – to be or not to be?. Although James Tobin’s original proposals referred to a tax on foreign exchange transactions, recent proposals have been to impose such a tax on a whole range of financial transactions.
Added impetus has been given to the move to adopt Tobin taxes by the publication of a video from an organisation known as the Robin Hood Tax Campaign. To quote the site “The Robin Hood Tax is a tiny tax on bankers that would raise billions to tackle poverty and climate change, at home and abroad. By taking an average of 0.05% from speculative banking transactions, hundreds of billions of pounds would be raised every year. That’s easily enough to stop cuts in crucial public services in the UK, and to help fight global poverty and climate change.”
So would this version of a Tobin tax work? The following videos and articles examine the proposal.
Actor Nighy backs Robin Hood banking tax campaign BBC Breakfast News (10/2/10)
Robin Hood banking tax ‘would raise billions’ (includes article) BBC Breakfast News (10/2/10)
Robin Hood tax on banks ‘would raise billions’ BBC News, Richard Westcott (10/2/10)
Celebrities launch ‘Robin Hood’ tax campaign BBC News, Hugh Pym (10/2/10)
Richard Curtis and Bill Nighy team up in new film urging Tobin tax on bankers (includes article) Guardian, Nick Mathiason (9/2/10)
Articles
Robin Hood tax offers a way to deal with our pressing problems Guardian letters (10/2/10)
Call for ‘Robin Hood tax’ on banking transactions Independent, James Thompson (10/2/10)
Joseph Stiglitz calls for Tobin tax on all financial trading transactions Telegraph, Edmund Conway (5/10/09)
I’m happy to play my part in the great Robin Hood Tax Telegraph, Bill Nighy (9/2/10)
The world’s greatest bank job! Ethiopian Review, Ian Sullivan (10/2/10)
Robin Hood tax could shrink currency markets by 14% ShareCast (10/2/10)
Don’t leave Greece to face the speculators alone Guardian, Larry Elliott (9/2/10)
Global support for a tax on banks is growing, says Gordon Brown Guardian, Helen Pidd (11/2/10)
Global bank tax near, says Brown Financial TImes, George Parker and Lionel Barber (10/2/10)
Get behind Robin Hood Guardian, Austen Ivereigh (19/2/10)
Questions
- Explain how a ‘Robin Hood tax’ would work.
- How would such a tax differ from Tobin’s original proposals?
- What would determine its effectiveness in stabilising financial markets?
- Would it be effective in raising tax revenue?
- Compare this tax with other methods of stabilising financial markets.
- What considerations would need to be taken into account in setting the rate for a Tobin tax on financial transactions?