H E W Are You Kidding?

[redwing]

First here's the BOE definition of HEW

The Bank’s estimate of HEW is intended to measure that part of secured borrowing that is not invested in the housing market.

HEW occurs when lending secured on housing increases by more than investment in the housing stocks. Investment comprises new houses, home improvements, transfers of houses between sectors, and house moving costs, such as stamp duty and legal fees (although these fees do not add to the value of the housing stock, they are measured as investment, so reduce the funds available for consumption). So HEW measures mortgage lending that is available for consumption or for investment in financial assets (or to pay off debt).

Source

And here's my anecdotal followed by what I think could be happening at the moment.

I STRed in 2005. I had 75% equity (so the remaining mortgage was just 25% of the selling price). I took 75% of the value out of the house and stuck it various other investments.

But for every seller there must be a buyer. I was lucky to find one who had nothing to sell and who had a 25% deposit and could afford the mortgage on the rest of the price.

So the net effect was that the mortgaged part of the house's value increased from 25% to 75%.

This would qualify the requirements of HEW in the BoE's definition. The amount of lending was balanced by the amount of equity withdrawal. There was no property development involved. And for the sake of argument, let's assume that all transactions were paid for out of pocket.

Which brings us to today.

There must be quite a few sellers who are close to the brink financially. Let's use a hypothetical example. Sellers out of a job who see the value of their house fall so that they have only about 5% equity left and are desparate to sell in order to move back in the parents. They luckily manage to sucker in a FTB who has got enough deposit to be able to get a mortgage.

As this housing transfer works, the equity in the house has increased from 5% to 25%. Neither party had another house to sell or one to buy. Consequently 20% equity has been pumped into the property and the amount of lending on it has fallen by the same 20%.

In other words this is negative HEW - I think a better phrase might be Housing Equity Injection.

It's possible that a lot of the sales that have taken place over the last 12 months have followed a similar pattern with less being borrowed by the buyer than the seller has paid back after the sale.

So, it's not just folk overpaying on their mortgages that can lead to negative HEW. It can also be coming from the reluctance of banks to lend on purchases at high LTVs.

[grizzly bear]

First here's the BOE definition of HEW

Source

And here's my anecdotal followed by what I think could be happening at the moment.

I STRed in 2005. I had 75% equity (so the remaining mortgage was just 25% of the selling price). I took 75% of the value out of the house and stuck it various other investments.

But for every seller there must be a buyer. I was lucky to find one who had nothing to sell and who had a 25% deposit and could afford the mortgage on the rest of the price.

So the net effect was that the mortgaged part of the house's value increased from 25% to 75%.

This would qualify the requirements of HEW in the BoE's definition. The amount of lending was balanced by the amount of equity withdrawal. There was no property development involved. And for the sake of argument, let's assume that all transactions were paid for out of pocket.

Which brings us to today.

There must be quite a few sellers who are close to the brink financially. Let's use a hypothetical example. Sellers out of a job who see the value of their house fall so that they have only about 5% equity left and are desparate to sell in order to move back in the parents. They luckily manage to sucker in a FTB who has got enough deposit to be able to get a mortgage.

As this housing transfer works, the equity in the house has increased from 5% to 25%. Neither party had another house to sell or one to buy. Consequently 20% equity has been pumped into the property and the amount of lending on it has fallen by the same 20%.

In other words this is negative HEW - I think a better phrase might be Housing Equity Injection.

It's possible that a lot of the sales that have taken place over the last 12 months have followed a similar pattern with less being borrowed by the buyer than the seller has paid back after the sale.

So, it's not just folk overpaying on their mortgages that can lead to negative HEW. It can also be coming from the reluctance of banks to lend on purchases at high LTVs.

could be, but if thats the case its probably going to be short lived...

[redwing]

Exactly. I reckon that this might lie behind the min-rally we've been seeing.

Folk with savings reckoning that they are getting so little interest in the bank that it is better to pump it into housing. Either buying for the first time [or at least buying without having any other property to sell]. Or paying down the mortgage.

Once the savings have been used up, we'll be back on the downward trend for house prices.

And in the meantime there's something like 6% of net household income being taken out of the economy. Positive HEW in 2006 was 3.5% of net income and in the first quarter this year it has been negative 2.9%.

The move to repay mortgages will be welcomed by many commentators concerned about the UK's level of debt, but it is bad news for beleaguered retailers.

Equity withdrawal accounted for 2.9% of people's post-tax income during the first quarter of last year, but during the first quarter of this year they spent the equivalent of 3.5% of their salaries paying down their mortgage.

source: Guardian today.

That's a net 6.4% less for other forms of investment or for consumer spending. The economy isn't going to get any better quickly with that kind of reduction in consumer activity.

Green shoots! Myaaarse!