Equity withdrawal set to spiral: Report predicts surge in people raising spending money through house loans

BILLIONS of pounds will be raised for spending through house loans in the next 15 years, according to a report published by the Joseph Rowntree Research Foundation. It forecasts that mortgage equity withdrawal will return to near its 1988 peak even with only a gentle recovery in house prices.

By using cash raised as part of a mortgage 2.5-3 per cent will be added to consumer spending by 2009, and could be inflationary, the report predicts. At the height of the housing boom in 1988, mortgage equity withdrawal increased spending by 2.5 per cent, and in the slump that followed depressed it by 1.5 per cent.

Peter Westaway, author of the report and an economist at the National Institute for Economic and Social Research, said: 'Of course, it is possible that consumers in the future may exploit their housing equity to an even greater extent than is assumed.'

The forecast distinguishes between two kinds of mortgage equity withdrawal. Money raised through trading down or last-time selling - caused by the death of elderly occupiers, for example - is likely to rise from pounds 275m in 1990 to pounds 634m in 2009. Reflecting the spread of owner-occupation during the past 20 years, the number of houses that will be inherited is poised to rise by half to just over 180,000 a year by the end of the next century.

Money withdrawn through either over-mortgaging or taking out a loan backed by the security of a house will increase from pounds 19.1bn in 1990 to pounds 49.1bn in 2009. The report finds that after two years all of this category finds its way into spending, compared with only a fifth of the first.

A relatively modest rise in house prices would eliminate most cases of 'negative equity' - a mortgage bigger than the value of the property on which it is secured, a second report from the foundation said.