For the whole of 2003, MEW amounted to a whopping £53bn. Not only was the level of equity withdrawn in the final three months of last year a record in absolute terms, it also exceeded the previous peak in relative terms. Put another way, at the height of the previous boom homeowners never withdrew more than 7.7 per cent of disposable income in a single quarter. The latest figures show that 8.3 per cent of disposable income was extracted from property in final part of last year.
The preference of consumers for withdrawing equity rather than borrowing on an unsecured basis is clearly demonstrated by figures published this week. Consumer credit (bank loans, overdrafts and credit cards) in the fourth quarter of last year rose by just £4bn. It was only at the beginning of 2001 that the level of MEW began to exceed the volume of consumer credit on a quarterly basis. Given the relatively cheap cost of MEW and the sharp rise in house prices, it is hardly surprising that consumers have made this choice.
We see little reason to expect any moderation in MEW over the course of this year. Indeed, we have revised up our expectations for the first quarter and now anticipate a further £16bn increase. For the whole of 2004, the level is likely to exceed £60bn establishing another record in the process.
That said, the current level of equity withdrawal needs to be kept in context. As the chart illustrates (see pdf below), the total volume of MEW during the 1980’s boom (in real terms) was actually greater than it has been so far during the current cycle. This suggests that homeowners are still not as vulnerable to a drop in house prices as they were in the 1990’s.
Meanwhile the March PMI survey for the manufacturing sector provides further reason for encouragement following yesterday’s profits data. All the key activity components rose and there was even a hint of a little more pricing power with the output price series climbing to its highest level since it began being compiled in November 1999.
Today’s figures provide further justification for the MPC raising base rates next week. Crucially, consumers remain unbowed by the half point tightening in policy already sanctioned and there appears increasing evidence that the economic recovery is spreading out to the manufacturing sector.
