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?
The Quarterly National Accounts from the Office for National Statistics (ONS) reveal that the output of the UK economy grew by 0.4% in the fourth quarter of 2009. This is another upward revision to the growth number for Q4; the first estimate put growth at 0.1% and the second estimate at 0.3%.
The ONS release also reported the value of the UK economy’s output in calendar year 2009. In the release, GDP in 2009 is estimated at £1.396 trillion. Now, this is what economists call the nominal estimate because it measures the economy’s output using the prevailing prices, e.g. in the case of output in 2009, the prices of 2009. Of course, the problem arises when we compare nominal GDP – or GDP at current prices – over time. If prices are changing how can we know whether the volume of output is actually rising or falling? Therefore, constant-price or real estimates are reported which aim to show what GDP would have been if prices had remained at their levels in some chosen year (the base year). The base year currently used in the UK is 2005.
If we look at nominal GDP estimates for the UK from 1948 up to 2008 we find that they rise each year. So, regardless of the fact that in some of these years output volumes fell, price rises (inflation) have been sufficient to cause nominal or current-price GDP to rise. But, this was not true in 2009!
But, why did nominal GDP fall in 2009? Well, firstly, the average price of the economy’s output, which is measured by the GDP deflator, rose by only 1.36% in 2009. This was the lowest rate of economy-wide inflation since 1999 (although real GDP or output rose by 3.9% in 1999). And, secondly, in 2009 output fell by 4.9%. The extent of the fall in output meant that price increases were not sufficient for nominal GDP to rise. In fact, the actual value of GDP in 2008 was £1.448 trillion as compared with £1.396 trillion in 2009. This means that nominal GDP fell by 3.6% in 2009. The next lowest recorded change, since comparable figures began in 1948, was actually in 2008 when nominal GDP rose by 3.5% (real GDP rose too in 2009, albeit by only 0.5%).
So, in short, the decline in both nominal and real GDP in 2009 indicates just how deep the economic downturn has been.
Articles
Britain’s economic growth revised up to 0.4% The Times, Gary Parkinson and Grainne Gilmore (30/3/10)
UK pulls out of recession faster than thought Reuters, Matt Falloon and Christina Fincher (30/3/10)
UK growth unexpectedly revised up to 0.4% BBC News (30/3/10) )
UK Q4 growth revised upward again to 0.4 pct Associated Press (AP), Jane Wardell (30/3/10)
Instant view – Q4 final GDP revised up to 0.4 per cent Reuters UK (30/3/10)
Data
Latest on GDP growth Office for National Statistics (30/3/10)
Quarterly National Accounts, Statistical Bulletin, March 2010 Office for National Statistics (30/3/10)
United Kingdom Economic Accounts, Time Series Data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- Explain what you understand by the terms ‘nominal GDP’ and ‘real GDP’. Can you think of other examples of where economists might distinguish between nominal and real variables?
- Explain under what circumstances nominal GDP could rise despite the output of the economy falling.
- The average annual change in nominal GDP since 1948 is 8.2% while that for real GDP is 2.4%. What do you think we can learn from each of these figures about long-term economic growth in the UK?
- What do you understand to be the difference between short-term and long-run economic growth? Where, in the commentary above, is there reference to short-term growth?
With an election approaching, there is much debate about recovery and cuts and about the relationships between the two. Will rapid cuts stimulate confidence in the UK by business and bankers and thereby stimulate investment and recovery, or will they drive the economy back into recession? The debate is not just between politicians vying for your vote; economists too are debating the issue. Many are taking to letter writing.
In the February 2010 news blog, A clash of ideas – what to do about the deficit, we considered three letters written by economists (linked to again below). There has now been a fourth – and doubtless not the last. This latest letter, in the wake of the Budget and the debates about the speed of the cuts, takes a Keynesian line and looks at the sustainability of the recovery – including social and environmental sustainability. It is signed by 34 people, mainly economists.
Letter: Better routes to economic recovery Guardian (27/3/10)
Letter: UK economy cries out for credible rescue plan Sunday Times, 20 economists (14/2/10)
Letter: First priority must be to restore robust growth Financial Times, Lord Skidelsky and others (18/2/10)
Letter: Sharp shock now would be dangerous Financial Times, Lord Layard and others (18/2/10)
Questions
- Summarise the arguments for making rapid cuts in the deficit.
- Summarise the arguments for making gradual cuts in the deficit in line with the recovery in private-sector demand.
- Under what conditions would the current high deficit crowd out private expenditure?
- What do you understand by a ‘Green New Deal’? How realistic is such a New Deal and would there be any downsides?
- Is the disagreement between the economists the result of (a) different analysis, (b) different objectives or (c) different interpretation of forecasts of the robustness of the recovery and how markets are likely to respond to alternative policies? Or is it a combination of two of them or all three? Explain your answer.
- Why is the effect of the recession on the supply-side of the economy crucial in determining the sustainability of a demand-led recovery?
A keenly awaited Budget, but what should we have expected? Chancellor Alistair Darling had warned that it wouldn’t be a ‘giveaway’ budget. The aim to cut the budget deficit in half over 4 years still remains and the UK economy is certainly not out of the woods yet.
You’ve probably seen the debate amongst politicians and economists over what should happen to government spending and it might be that the lower than expected net borrowing for 2009-2010 provides a much needed boost to the economy. With the election approaching, it seemed likely that some of this unexpected windfall would be spent. The following articles consider some key issues ahead of the 2010 Budget.
Budget 2010: Alistair Darling’s election budget BBC News, Stephanie Flanders (21/3/10)
Build-up to the Budget Deloitte, UK March 2010
Pre-Budget Report: What Alistair Darling has announced before Guardian, Katie Allen (9/12/09)
Budget 2010: Darling warns of ‘no giveaway’ BBC News (11/3/10)
FTSE climbs ahead of UK Budget Financial Times, Neil Dennis (24/3/10)
Bank bonus tax could net Treasury £2bn, E&Y says Telegraph, Angela Monaghan (24/3/10)
Alistair Darling set for stamp duty move BBC News (24/3/10)
Labour has run out of steam, says David Cameron Guardian, Haroon Siddique (24/3/10)
Ten things to look out for in the 2010 Budget Scotsman (24/3/10)
Sammy Wilson predicts ‘neutral budget’ BBC News, Ireland (24/3/10)
Do the right thing, Darling Guardian (24/3/10)
What do we want from the Budget? Daily Politics (23/3/10)
Budget boost for Labour as inflation falls to 3% TimesOnline (24/3/10)
Questions
- Why has the FTSE climbed ahead of the Budget?
- Why is there a possibility of a rise in stamp duty again? To what extent do you think it will be effective?
- Net borrowing for 2009/10 is expected to be lower than forecast. What should happen to this so-called ‘windfall’?
- What is expected from the Budget 2010? Once the Budget has taken place, think about the extent to which expectations were fulfilled.
- Why are excise duties on goods such as taxes and alcohol likely to be more effective than those on other goods?
The latest inflation numbers are a joy for headline writers! With the falling price of toys, we can perhaps speak of ‘inflation toying with us’, while the fall in the cost of gas might allow us to say that ‘gas takes the fuel out of inflation’. More generally, the latest inflation figures from the Office for National Statistics (ONS) show the annual rate of CPI inflation falling from 3.5% in January to 3% in February. In other words, the weighted price of a representative basket of consumer goods and services rose by 3% in the 12 months to February as compared with 3.5% over the 12 months to January.
In compiling the Consumer Price Index (CPI), the ONS collects something in the range of 180,000 price quotations over 650 representative goods and services. These goods and services fall into 12 broad product groups. The items to be selected for these groups are reviewed once a year so that, in the face of changing tastes and preferences and changes in the goods and services available to us, the ‘CPI shopping basket’ remains representative. A price index and a rate of price inflation are available for each of these 12 broad groups as well as for goods and services within these groups. So, for instance, we can obtain a price for ‘transport’, then, within this group, we can obtain a price for the purchase of ‘vehicles’ and, finally, a price for ‘new cars’ and for ‘second-hand cars’. This level of detail also means that individuals can calculate their own personal inflation rates using the ONS personal inflation calculator.
So what of the latest fall in the rate of CPI inflation? Well, the ONS reports ‘widespread’ downward pressures. This phrase needs some careful unpicking. Downward pressure is reported from ‘recreation and culture’ because its average price was static in February, but rose a year earlier. Within this group, the average price of games, toys and hobbies fell this year, but increased a year ago and, so, our possible headline ‘inflation is toying with us’. Similarly, downward pressure is reported from ‘housing and household services’ where a fall in its average price this year follows static prices a year ago. A major driver of this change was a reduction in average gas bills and so our other possible headline, ‘gas takes the fuel out of inflation’.
The latest price numbers from the ONS show that some product groups are experiencing long-term price deflation. For instance, while the average price of ‘clothing and footwear’ actually rose in February, when we analyse annual rates of price inflation for this product group, one has to go back to March 1992 to find the last time it was positive! Indeed, within the slightly narrower product group of ‘clothing’, the average annual rate of price deflation over the past ten years has been 6.1%. A similar longer-term trend of price deflation can be found in the product group ‘audio-visual, photo and data processing’. Here there has been an average annual rate of price deflation of 9.9% over the past ten years. So, smile for the camera!
Articles
Rates set to remain at record low as inflation falls back sharply heraldscotland, Ian McConnell (23/3/10)
Inflation data boosts government before budget AFP (23/3/10)
UK inflation rate falls to 3% in February BBC News (23/3/10) )
Inflation slows more than expected Reuters UK, David Milliken and Christina Fincher (23/3/10)
UK inflation falls sharply to 3% Financial Times, Daniel Pimlott (23/3/10)
Inflation rate fell to 3 per cent in February Independent. James Moore (24/3/10)
Inflation falls back to 3% Guardian, Philip Inman (23/3/10)
How soon before we scrap the Bank’s inflation target? Telegraph, Edmund Conway (23/3/10)
Data
Latest on inflation Office for National Statistics (23/3/10)
Consumer Price Indices, Statistical Bulletin, March 2010 Office for National Statistics (23/3/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Questions
- Explain the difference between an increase in the level of prices and an increase in the rate of price inflation.
- The annual rate of price inflation for clothing in February was -3.9%. If the average price of clothing was cheaper, year-on-year, how could it have exerted ‘upward’ pressure on the overall rate of CPI inflation?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for audio-visual, photo and data processing equipment has been -9.9%?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for clothing and footwear has been -5.7%?
- What factors might help to explain why the annual rate of ‘new car’ price inflation was 5.4% in February 2010 compared with -0.2% in February 2009?
- What factors might help to explain why the annual rate of ‘second-hand’ car price inflation was 19.0% in February 2010 compared with -15.1% in February 2009? And, are you surprised at the difference in the rates of ‘new’ and ‘second-hand’ car price inflation?