Each year, homeowners borrow tens of billions against their homes to subsidise their lifestyles. What happens when these chickens come home to roost?
According to the latest report from the Bank of England, UK homeowners borrowed £12½ billion against their homes in the first three months of this year -- and then simply spent it.
In other words, by borrowing against their homes and not reinvesting this money in property, these homeowners have withdrawn some of their housing equity (the difference between the value of their homes and the mortgage debts secured on them). Hence, this act is known as mortgage equity withdrawal, or MEW, and it's become a popular way to subsidise our lifestyles, as the following table demonstrates:
Mortgage equity withdrawal (MEW) over the past decade
|
Year |
MEW |
Take-home |
MEW as |
|---|---|---|---|
| 1996 | -3.6 | 542 | -0.7 |
| 1997 | -0.6 | 575 | -0.1 |
| 1998 | 0.2 | 597 | 0.0 |
| 1999 | 9.9 | 623 | 1.6 |
| 2000 | 12.0 | 658 | 1.8 |
| 2001 | 20.8 | 702 | 3.0 |
| 2002 | 39.4 | 727 | 5.4 |
| 2003 | 57.2 | 762 | 7.5 |
| 2004 | 49.6 | 791 | 6.3 |
| 2005 | 37.9 | 831 | 4.6 |
So, as you can see, mortgage equity withdrawal was negative during 1996 and 1997, which means that homeowners actually repaid some of their mortgage debt, instead of increasing it. However, MEW really started to take off in 1999, because house prices had started to creep up in 1996 -- and MEW only gets popular when house prices are going up.
As you can see, MEW peaked in 2003, reaching £57 billion, or a fourteenth (7.5%) of our total take-home pay. It's no coincidence that the previous year was a stonking year for house prices, with the average price rising by more than a quarter (26%) in 2002.
Hence, MEW is a beast which rears its ugly head during housing booms, when rising house prices create an increased sense of wealth and encourage homeowners to draw on this new-found capital. Hence, I had expected it to begin to fall as house-price growth came off the boil, but, to my surprise, this hasn't happened.
Then it dawned on me: the reason why MEW remains a popular way to get hold of money is simple: homeowners have become hooked on it, and use it as a handy way to bridge the gap between their Champagne tastes and beer incomes! Ominously, three-fifths (60%) of all secured loans are used for debt consolidation.
Let me put this as simply as I can: most MEWers splurge money and build up debts on credit cards, loans, overdrafts and so on, and then secure these debts against their homes. Alas, this is a recipe for utter ruin, as it will be hugely difficult for many of these people to stop being addicted to living on credit. In the end, this financial mismanagement will cause thousands of these folk to lose their homes, simply because they were unable to tighten their belts and live within their means.
If you think that I'm being a scaremongering Cassandra, you'd be right. On the other hand, in the early Nineties, I saw scores of people lose their homes through repossession orders. This happened not because they couldn't pay their homebuyer mortgages, but because they were unable to keep up repayments on secured loans, second mortgages and consolidation loans. Expect similar actions to arrive at a Court near you very soon!
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