Saturday, March 21, 2009

The home equity housing bubble

(click on the chart for a sharper image)

The recent housing bubble was strange. The volume of sales didn't increase much, yet prices shot up. This lack of activity also features in gross mortgage lending data. Loans for house purchases remained comparatively flat throughout the bubble (see the chart above).

In contrast, home equity lending exploded. By 2007, it accounted for almost 40 percent of all mortgages. Of course, these loans fed straight into consumption. Homeowners, who are mostly middle aged, borrowed and spent, based on the illusion that they were rich because house prices were inflating. In the post-bubble world of 2009, this idea seems truly bizarre, but that is how things worked in early 2007.

Buy-to-let was the other major growth area for mortgage lending. By 2007, around a quarter of loans were financing small time property investment. Many of these investors were already home owners, who used the equity in their homes to provide collateral to dive into fully fledged speculation via the BTL market.

There is an interesting implication here. While the housing bubble generated a huge amount of personal debt, it is heavily concentrated among home owners. Renters never found it easy to get access to credit. Apart from college loans and some heavy credit card balances, young people are also comparatively free from debt.

So behind the government's banking sector intervention lurks a homeowner bailout. Brown wants banks to increase their lending, in the vague hope that house prices will stabilize and the home equity bubble can resume.

This bailout works against the interests of both renters, and the young. Higher house prices shuts out renters from home ownership, while huge bailouts puts the burden of paying for this mess on young taxpayers.

There will be some pay-back for this mess. One day, those young taxpayers will have to pay for the pensions of heavily indebted homeowners. I wonder how generous they will be?

(The chart comes from the FSA's Turner report)


  1. A slightly ageist subtext here.

  2. prices rose partly because fewer people were selling...

    brown increased stamp duty to levels that made trading up too expensive...

    people enlarged/improved the house they had...

    hips, later, also acted to decrease sales...

    the people who may have put their house up for sale to see what would happen...

    but then decided to sell when a good offer came along...

    these people were put off because of the financial commitment involved...

    brown relied on the housing boom to deliver tax revenues to fund the client state...

  3. Alice, that is one of your best charts yet, I hadn't realised that MEWing was so huge as a %.

    That sort of nails the whole discussion on the house price/credit bubble down once-and-for-all, thanks!

  4. You tell me how this is good for the housing market? The government through bailouts, fiscal stimulus, monetary programs, and every other imaginable bailout has committed over $9 trillion to the cause. You know how many $50,000 a year jobs we can buy with that for one year?

  5. I have to agree with Mark, that's a truly awesome chart. And very,very scary.

  6. I'd never even heard of equity withdrawal a few years ago. That is an astonishing graph. It's a pity you don't have the 2008 data because the obvious implication is a severe credit reduction by less MEWing which will hurt the real economy badly.

  7. "Homeowners, who are mostly middle aged, borrowed and spent, based on the illusion that they were rich because house prices were inflating." No, I just borrowed and spent because I had education costs to meet and knew that I could pay it back when I got my pension lump sum. What happens to the poor sods whose pensions go bust so that they don't get their lump sums I hate to think.

  8. I suggest the amount lent for true home purchase actually decreased and the figures have been skewed by fraudulent BTL loans where investors posed as owner occupiers to receive better loan deals. I know people who did this, so it’s rational to assume it was widespread and was a standard service offered by many brokers.

    So much for helping “hardworking home owners”, rather this bailout is about supporting greedy investors, feckless borrowers who spent money they never had and of course the retched banks which so carelessly lent all the dosh.

    God, I hate this government.

  9. More to the point - will young professionals be prepared to slave away in this country for the privilege of paying other peoples' pensions whilst themselves being forced to pay over the odds to live in a hovel in a less salubrious part of town ?

    If this housing bubble is allowed to persist then we simply don't deserve young doctors, nurses, engineers ...

    They would be perfectly justified in upping sticks and going to places where they are treated with more respect.

  10. The graph shows only one thing. The proportion of lending by type over time. It does not serve to prove which section of the demographic did any particular thing, nor their motives in so doing.

    If, as speculated, a lot of equity withdrawal was being spent on consumption by middle aged people, is it not reasonable to speculate that a lot of it was to pay the university fees of those middle aged persons by now teenaged kids or indeed to buy flats for those same offspring unable to get on the ladder themselves?

    It is possible a lot of EW went into second homes abroad, or buying to let without bank imposed renting criteria.

    Its all guesswork. It is very interesting that so small a percentage of lending was for new purchases. It would be illuminating to find out what actually the money's were used for as this has implications for the future health of our economy.

  11. Here's a suggestion - some of the borrowing was by people in late middle age, for lending to their young adult children to use as a deposit for house purchase. There's a positive feedback, eh?

  12. I now do not trust anyone who is a home owner over the age of 40 (my age). I now know the true extent of the scam these people pulled. It is just blinding and audacious: I refuse to help them out. Fuck em!

  13. As a houseowner over the age of 40 the only scam I'm guilty of is trying live within my means and get the damn mortgage paid down - modest in amount as it is compared with some of you southern jessies..... :-)

    ....and I've maintained for a long time that equity withdrawal should be assessible for CGT at 40%. Sell your house and roll the equity over into a smaller mortgage on the new property - fine, no CGT. Sell and take out equity - pay 40% tax. Remortgage and raise capital from equity - pay 40% tax. Whether you're adding a conservatory (ahem) or consolidating debt.

    It may not have the subtlety of Mark Wadsworth's LVT but it'd be easy to implement (a few lines in the Finance Act), easy to collect (via lawyers) and hard to avoid. And it would stop people believing in money from nothing once and for all.

  14. former tory,

    a damn fine idea - CGT on MEW.