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?
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. Sky, who have an estimated 85% share of the market were investigated by Ofcom and a decision has now been made. Sky will be forced to reduce the price it charges to other Broadcasters for showing premium sport channels. The wholesale price of Sky Sports 1 and 2 (two of my favourite channels!!) will each be reduced by just over 23% to £10.63 a month each. The idea is that this decision will benefit consumers by increasing choice. However, Sky argues that it will be to the ‘detriment of consumers’ as incentives to invest and take risks will be blunted.
Furthermore, there are also concerns that it will mean less money going into sport. Rugby, football, tennis etc benefit from some very lucrative TV rights deals and if Sky is forced to reduce prices (it is appealing the decision), then the value of these deals is likely to decline, which may lead to less investment in grass-routes participation.
Whilst progress has been made within this area, critics argue that Ofcom have not gone far enough and should have extended their decision to more sport channels (not just Sky Sports 1 and 2) and even to the premium movie channels. This would again increase consumer choice and provide more people with access to premium TV. This would work alongside more innovation within the pay-TV industry, which has seen Sky being given permission to offer pay-TV services on freeview, which will open up pay-TV to millions more consumers. Whilst no action has been taken regarding Sky’s dominance of premium movie channels, this issue has been referred to the Competition Commission. Is Sky’s dominance over sporting events about to come to an end?
Articles
BSkyB ordered to cut sports channels rates Reuters, Kate Holton (31/3/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
Consumers are big winners in BSkyB ruling Financial Times, Ben Fenton and Andrew Parker (31/3/10)
BSkyB should shake hands and move on Financial Times (31/3/10)
Sky told to cut wholesale prices by regulator Ofcom BBC News (31/3/10)
Ofcom v Sky BBC News blogs: Peston’s Picks, Robert Peston (31/3/10)
BSkyB ‘restricting competition’ BBC Today Programme (31/3/10)
Ofcom orders Sky Sports price cut Guardian, Mark Sweney (31/3/10)
Sky ruling: Culture Secretary challenges Tories to back Ofcom Guardian, Mark Sweney (31/3/10)
Sky forced to cut the price for top sports events: Q and A Telegraph, Rupert Neate (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Regulator sets the fuse for shake-up of pay-TV Independent, Nick Clark (31/3/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Pay TV Statement Overview (31/3/10)
Pay TV Statement Summary (pdf file) (31/3/10)
Pay TV Statement Full document (pdf file) (31/3/10)
Questions
- To what extent will Ofcom’s decision to force Sky to reduce prices lead to an increase in consumer choice? Why is consumer choice good?
- Why has Sky been able to charge such high prices in the past, in particular for sports channels?
- According to the BBC News article, Sky shares were the biggest risers on the FTSE by midday on the day of the announcement. Why do you think this was the case?
- Would a similar decision on premium movie channels significantly increase consumer choice?
- Into which market structure does the Premium TV industry best fit? Consider the characteristics of the pay-TV industry. Into which market structure does it best fit?
- Why may Ofcom’s decision lead to less investment in sport at the grass roots?
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.
Public finances aren’t in a great state – that’s no secret. However, what is remaining a secret is exactly how and when the main political parties intend to reduce the budget deficit. The UK’s credit-rating is under pressure and with the election approaching, we can expect government finances to come under increasing scrutiny. Whichever party forms the government will face the unenviable task of having to pull Britain out of a recession, while trying to reduce: 1) a forecast budget deficit for 2009/10 of £167 billion (about 13% of GDP), 2) a government debt of 68.6% of GDP, with 3) £73.8 billion alone going on interest payments and 4) a trade deficit of £8 billion. Who would be a politician?!
Phoney deficit wars BBC News, Stephanomics (26/3/10)
Questions
- What is the structural deficit?
- A fall in government spending may improve public finances, but why may it adversely affect the UK’s recovery?
- Outline the main proposals by the Labour, Conservative and Liberal Democrat Parties to tackle public finances. Are any of their proposals viable?
- Why is the UK’s credit-rating under pressure? If the UK is down-graded, what could this mean?