Mortgage equity withdrawals highest since 1980s boom

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The amount of cash that people are borrowing against the value of their homes has hit its highest level since the tail-end of the 1980s boom, it emerged yesterday.

Mortgage equity withdrawal surged by more than £7bn in the three months to September, the highest figure ever recorded and a 34 per cent jump on the previous quarter.

Economists said this was helping to fuel the boom in shopping and said it echoed the recent warning from the Bank of England that consumer spending must slow to avert a rise in interest rates.

"This shows that a rate cut is not even on the cards," said Michael Hume, UK economist at Lehman Brothers. "If the Bank wants consumer spending to slow it will have to use rates to get it to slow."

The figures from the Bank of England showed mortgage equity withdrawal as a percentage of post-tax income, which measures its real impact, rose to 4.1 per cent. This was the highest since the second quarter of 1990, when it was 4.5 per cent, although it is still well short of the 8.1 per cent hit in 1988.

Mr Hume said the worry for the Bank would be the extent to which homeowners were using their houses to fund their spending sprees, which have inflationary implications.

"It shows that the shortfall in incomes in the third quarter was not enough to slow consumer spending because people feel confident enough and feel that [lending] deals are cheap enough to borrowing against rising property prices," Mr Hume said.

The latest figures show the housing market is booming. Halifax, the largest mortgage lender, said prices rose 15.5 per cent last year, the largest increase since 1988, with one area, East Anglia, rising almost 20 per cent.

This fed through to record spending over Christmas with one store, the computer games specialist Electronics Boutique, recording a 46 per cent surge in sales.

The boom was fuelled by a fall in mortgage rates to their lowest level since 1955 in the wake of the seven rate cuts ordered by the Bank last year.

Most lenders believe house price growth will slow to just 6 or 7 per cent next year, either because rising unemployment will curb demand or because an unexpectedly strong economic recovery would force rates back up.

Simon Rubinsohn, the chief economist at the City stockbroker Gerrard, said there was no sign of a let-up in the fourth quarter, which saw another half-point cut in rates.

"Our provisional arithmetic suggests that equity withdrawal may have increased further in the final three months of the year," he said.

Meanwhile, Britons have continued to ratchet up their spending abroad. Tourists' overseas spending in the first 11 months of last year jumped by 6 per cent compared with 2000, National Statistics said.