Repairing their balance sheets: households increase housing equity

Figures released by the Bank of England show that in the third quarter of 2009 UK households increased their housing equity (i.e. repaid mortgage debt) by £4.9 billion, equivalent to 2% of their disposable income. This was the sixth consecutive quarter in which saving in housing exceeded net mortgage lending. Interestingly, during each of these six quarters the UK economy contracted.

Saving in housing (or ‘negative housing equity withdrawal’ (HEW)) will reduce aggregate demand if it is funded out of income that would otherwise have been spent on consumer goods and services. Since the proportion of income saved, as measured by the saving ratio, climbed from an historic low of 0.9% in the third quarter of 2008 to 8.6% in the same quarter of 2009, increased saving in housing equity has been depressing spending levels. Indeed, across the six quarters in which HEW has been negative, households have increased their stock of housing equity by £33.9 billion, equivalent to 2.3% of disposable income – money which could otherwise have been spent.

Increased saving in housing by households is an example of the household sector’s attempt to repair its balance sheets. Another example has been the fall in the sector’s outstanding stock of unsecured debt (e.g. outstanding personal loans and credit-card debt). Elsewhere in the economy, banks too have been looking to repair their badly damaged balance sheets and, of course, there is the considerable interest in how the UK government will reduce its budget deficit. We can expect these repairs to balance sheets to have some impact on the pace of economic recovery. What is less certain is the size and duration of these balance sheet effects.

Home loan repayments ‘a priority’ BBC News (29/12/09)
Homeowners pay off £5bn of mortgage debt Financial Times, Vanessa Houlder (30/12/09)
Homeowners stop cashing in on the value of their homes Telegraph, Myra Butterworth (29/12/09)
Mortgages paid off at the fastest rate for 40 years Guardian, Larry Elliott (30/12/09)
Homeowners rush to repay mortgages thisismoney, Rosamund Urwin (29/12/09)


  1. What factors might explain why UK households have been increasing their saving in housing equity during 2009?
  2. Why might increasing amounts of HEW, such as those in the mid 2000s, not necessarily result in higher levels of consumer spending?
  3. What do you understand by the ‘household balance sheets’? What do you think is likely to be the most significant item on the sector’s balance sheets?