The UK economy after the recession-Part 4

4 02 2009


4. House prices,debt and the credit crisis

I believe that new net mortgage lending is very likely to fall below zero in 2009 (compared to around £40 billion this year and £108 billion in 2007) with only a modest recovery likely in 2010. No new net mortgage lending across a full calendar year would be unprecedented and is likely to be associated with further weakness in consumer spending and an increase in unemployment. In the housing market it is difficult to see why this would not also involve further house price falls and fewer housing starts.[1]


The bubble in house prices has been unwinding over the past year. How important was it in the prosperity of the past ten years?


The value of residential housing as a percentage of total UK non financial asset values rose from 50% to 61% between 1999 and 2007.[2]Over the past 2 years home owners have been withdrawing equity at a rate equivalent to about 5% of post tax income, or around £42b per annum, in order to spend on other things. This helps to explain why despite moderate wage rises there was a growing sense of prosperity in the UK.

By the second quarter of 2008 equity withdrawal had reversed and homeowners paid back into their mortgages or paid for housing by cash to the tune of £2.8b, thus reducing their spending power.[3]

Saving and debt

Household saving fell from 10% of income in 1997 to 2% in 2007[4] while personal debt in the UK, comprised of mortgages, loans and credit cards rose to 1.444 trillion by 2008. This compares with household wealth of 3.7 trillion of housing assets and over 4 trillion of financial assets.[5]

Household debt represents more than one year’s total GDP rising at a faster rate than GDP, by 7.3% compared to 5.1% for GDP.[6]We would all have to work for more than a whole year without consuming anything to clear the debt.

By the end of 2005, UK banks were no longer financing lending from customer deposits but began to borrow from the wholesale markets. In an attempt to spread the risk from this over borrowing debt was sold and resold. As The Sunday Times pointed out,

‘Everything from mortgages to credit card debts to multi-billion loans given to private equity companies were packaged up into bonds and sold to hedge funds, pension funds and other large institutions.’[7]

 It was from this point that the UK became over exposed on the debt front. Essentially we were living beyond our means. Currently the amount owed by UK banks to global markets is around £740b.




[1] Sir James Crosby: Mortgage Finance Markets HM Treasury November 2008

[2] The Blue Book 2008p243

[3] Bank of England statistics Housing Equity Withdrawal

[4] Blue Book 2008 p107

[5] The UK economy, analysis of long-term performance and strategic challenges March 2008 HM Treasury p4

[6] Daily Express 22 August 2008

[7] Sunday Times 30 November 2008 section 2 page 7





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