Britons cashing in on house prices boom send equity withdrawal to 12-year high

Britons are cashing in on the meteoric surge in the value of their homes to embark on massive spending sprees, the Bank of England warned yesterday.

Homeowners borrowed a record £8bn against their properties in just three months, according to figures for the first quarter of the year.

The report will ring alarm bells on the Bank's Monetary Policy Committee as it could herald an inflationary boom that would force it to hike interest rates.

The Bank will also be worried households are taking on mountains of debt that could leave them exposed if house prices fell or borrowing costs surged.

Yesterday figures showed that mortgage equity withdrawal – loans not used for house purchase or remortgaging – jumped to £8.1bn in the three months to March from just £4.1bn a year ago and £7.5bn in the previous quarter.

The latest figure is a record in cash terms and as a share of post-tax income is at its highest level since 1990 although it is well short of the all-time peak of 8.1 per cent in 1988.

The figures comes just days after both Halifax and Nationwide said house prices were rising at an annual rate of almost 20 per cent, the fastest since the peak of the last boom in 1989.

The equity withdrawal data are the latest piece of news to sound an echo from the 1980s when a surge in prices ended in a crash that left thousands homeless.

Hikes in interest rates and the abolition of a tax break saw house prices fall and borrowing rates surge, leaving millions with a home worth less than their mortgage.

Last month the Bank used its review of financial stability to warn that the ratio of household debt to income was already at a record while borrowing was continuing to accelerate.

However, it added that because of low interest rates, the household sector was not under "immediate pressure".

The MPC would have seen both yesterday's figures and the house price reports when they decided to keep interest rates on hold at a 38-year low of 4.0 per cent.

City analysts will scour of minutes of the meeting on 17 July to see how concerned the MPC is about the housing market.

John Butler, UK economist at HSBC, said the surge in equity withdrawal could be "an early indicator of continued consumer growth".

"The danger is that consumers' balance sheets are now directly related to house prices. Any future drop in house prices could be related to severe financial distress," he said.

However recent reports have pointed to a slowdown in the consumer economy, with retail sales growth weakening, consumer spending lower than first thought and housebuilders hinting that the housing market is slowing.

Meanwhile inflation is well below the Government's target and some prices on the high street, including big-ticket items such as cars, have been falling.

"The Bank of England is looking at the overall economy and a rate hike is not expected until September," said Ciaran Barr, chief UK economist at Deutsche Bank.

The latest trading figures from the John Lewis group showed that sales slowed in the latest week.

Meanwhile inflationary pressures in Britain rose gently for the fifth month running in June, a leading research body said.

The Economic Cycle Research Institute said lower unemployment and rising raw material prices helped push up inflationary pressures.

In a research note published before the figures, Geoffrey Dicks, chief UK economist at Royal Bank of Scotland, said wage growth rather than house prices were the key threat to the inflation target.