Record pay-off of mortgages by UK households

In an ominous development for house prices and spending on the high street, the Bank of England says that record amounts of money are being used by families to repay mortgages and to pay off other debts secured on their homes – with little new lending to first-time buyers to balance the depressing impact on the economy.

The Bank's latest statistics on housing equity withdrawal show that British families paid off £7bn, net, of mortgage and other secured debt in the last three months of 2010 – the highest net repayment since records began in 1970. It marks an acceleration on the £6.6bn paid off between July and September.

As a percentage of incomes, the net pay-off of debt in the three months of 2010 was also at a near record 2.7 per cent, a shade behind the 2.8 per cent of income paid off in the last months of 2008, in the depths of recessionary gloom.

The Bank commented that "weakness in housing equity withdrawal continues to be driven by the relative weakness of lending compared with resilience in housing investment".

There has now been a net injection of funding to pay off housing debt for almost three years – a cumulative reduction in debt of more than £57bn.

A rational response by consumers to the lowest Bank rate in 315 years might have been to increase borrowing; but the limited availability of mortgage finance, and the way lenders have only partially passed on cuts in official rates to retail borrowers have dampened the effectiveness of Bank policy.

The Bank's Monetary Policy Committee will announce its latest decision this Thursday. A rise in the Bank rate from 0.5 per cent is regarded as unlikely but not impossible by analysts. A rise in May is a more likely bet.

Despite some resilience in real estate, and a continuing aspiration to own a home, the banks remain reluctant to lend to any but the best credit risks, and many commentators believe the outlook for house prices is troubled, as public spending cuts, tax rises and worries about jobs in the public sector will take their toll on confidence in the coming year – all part of what the Governor of the Bank, Mervyn King, characterises as the longest squeeze on living standards since the 1920s. The stagnant level of property values is also constraining the withdrawal of value.

Increasing uncertainty about the economic outlook among households and banks – including the assumption of an eventual rise in interest rates this year – seems to be clouding financial sentiment, according to survey evidence and the latest news from retailers. A fresh survey of British industry suggests that pessimism is also spreading to the corporate sector.

The British Chambers of Commerce says that the "overall picture is worrying", with the soaring cost of raw materials squeezing profit margins and confidence. The BCC says that the conclusions of its poll of 6,000 firms shows an outlook "mediocre and disappointing, particularly for manufacturing". It predicts that the economic upturn in the first quarter of this year will only just compensate for the snow-related fall in output at the end of last year, indicating the feeblest of revivals. Business cashflows have been affected by bad weather and the VAT increase.

David Frost, the director-general of the BCC, said: "While the Government has listened to calls to help the private sector create growth, there is more to be done in giving businesses greater confidence, and encouraging them to export, invest and create more jobs. As the public sector cuts start to bite, the Government must get the detail right on the measures announced in the Budget to generate economic growth."

During the boom years, many consumers used the rising value of their homes, in effect, as a cash machine to fund a consumption boom: some £13.8bn was withdrawn from the value of homes in this way in the spring of 2007 alone, for example.

Since the recession that trend has gone sharply into reverse, and households are "deleveraging".