Conventional Wisdom: Falling House Prices = Falling Consumer Spending

[Visitor]

Just like the Supply and Demand, and the we need more houses to be built arguments, of which I am dubious to say the least, we also regularly read that Falling house prices will depress consumer demand in the retail sector. Whilst I can appreciate how falling house prices might significantly affect sentiment in the DIY retail sector as people see less desire to improve a home that is falling in value but I don't see an obvious link to the general retail sector. i.e. Falling house prices make people buy less: groceries, MP3 players, gym memberships ...

Obviously anybody paying a huge mortgage will be somewhat compromised on buying electronic toys but that would have been the case irrespective of their present house value trend upward or downward? And for those who have recently bought property surely they are so stretched on their monthly mortgage payment that they were not hanging-out in Curry’s Digital buying gadgets anyway?

So how is retail spending so tied to property value?

Any views?

[South Lorne]

So how is retail spending so tied to property value?

Any views?

....three words....MEW.....

[Visitor]

....three words....MEW.....

Hmm, but in nineteen words, I am not convinced that people withdraw equity on their houses in order to splash out on retail spending.

I can imagine mortgage equity withdrawal being used to settle significant debts, and that might be related, but in the main it is for much more significant commitments, like paying the children's education, housing deposits etc. Does anybody have any stats on the typical applications for released capital ... ?

Edited September 2, 2007 by Visitor

[South Lorne]

Hmm, but in nineteen words, I am not convinced that people withdraw equity on their houses in order to splash out on retail spending.

I can see mortgage equity withdrawal being used to settle significant debts, and that might be related, but in the main it is for much greater taks like paying the children's education etc. Any stats on this ... ?

...you'll find that many people run up their credit cards into at least £tens of thousands each year and MEW annually.......cars are bought...holidays taken ...and yes...school fees are paid.....

[nohpc]

Hmm, but in nineteen words, I am not convinced that people withdraw equity on their houses in order to splash out on retail spending.

They do. People are stupid. They think house price gains MEW is free money. Never underestimate how stupid people are. Especially with money.

[Methinkshe]

Just like the Supply and Demand, and the we need more houses to be built arguments, of which I am dubious to say the least, we also regularly read that Falling house prices will depress consumer demand in the retail sector. Whilst I can appreciate how falling house prices might significantly affect sentiment in the DIY retail sector as people see less desire to improve a home that is falling in value but I don't see an obvious link to the general retail sector. i.e. Falling house prices make people buy less: groceries, MP3 players, gym memberships ...

Obviously anybody paying a huge mortgage will be somewhat compromised on buying electronic toys but that would have been the case irrespective of their present house value trend upward or downward? And for those who have recently bought property surely they are so stretched on their monthly mortgage payment that they were not hanging-out in Curry’s Digital buying gadgets anyway?

So how is retail spending so tied to property value?

Any views?

It has to do with sentiment. When property prices are rising, people feel richer, so even if they don't actually MEW the cosy feeling people get from watching their equity increase translates into freer spening on the High Street. Of course, the reverse is also true. When property prices start to fall, people begin to feel jittery and rein in their spending. Doesn't matter whether the gains or losses are illusory, the sentiments still prevail.

[Knut]

It has to do with sentiment. When property prices are rising, people feel richer, so even if they don't actually MEW the cosy feeling people get from watching their equity increase translates into freer spening on the High Street.

Yes, I would go along with this view. As with all the trading markets it seems sentiment is the key.

[DabHand]

MEW counts for anything up to 8% of income.

Here's an old graph, keep google digging and l'm sure you'll find more recent info.

http://www.telegraph.co.uk/money/main.jhtm...shots/mew.jhtml

Remember that this is spent money which has been borrowed, not earned. Given a 70% consumer/retail based economy, MEW has therefore contributed up to approx 5% of GDP in the last 6 years.

[sikejsudjek]

Don't forget that less money borrowed = less money created. As 97% of all new money into the economy is in the form of new credit, reduce this and there really is less to spend.

[steve99]

They do. People are stupid. They think house price gains MEW is free money. Never underestimate how stupid people are. Especially with money.

Even nominaly intellegent people like engineers, teachers and lawyers can think like this, I know examples of each

MEW counts for anything up to 8% of income.

Here's an old graph, keep google digging and l'm sure you'll find more recent info.

http://www.telegraph.co.uk/money/main.jhtm...shots/mew.jhtml

Remember that this is spent money which has been borrowed, not earned. Given a 70% consumer/retail based economy, MEW has therefore contributed up to approx 5% of GDP in the last 6 years.

Suspect then that when the recession hits it will be much worse than the early 90's as MEW was pretty much unheard of then, in that particular recession unemployment went over 10%, how much next time? there is far more 'borrowed money' spending currently than in previous years and Im sure much of this will be curtailed.

[insidetrack]

MEW counts for anything up to 8% of income.

Here's an old graph, keep google digging and l'm sure you'll find more recent info.

http://www.telegraph.co.uk/money/main.jhtm...shots/mew.jhtml

Remember that this is spent money which has been borrowed, not earned. Given a 70% consumer/retail based economy, MEW has therefore contributed up to approx 5% of GDP in the last 6 years.

And dont forget the massive loss of income to EA, solicitors, surveyors and mortgage brokers when house prices drop and house sale volumes plummet.

When the housing market tanks, the government will need to increase spending to boost the economy and pay for rising unemployment. Unfortunately they are already way overspending and, when the recession bites, they are going to have less coming in via stamp duty, VAT, income tax and corporation tax.

My god, could they have made a bigger mess of things if they'ed tried?

[Knut]

And dont forget the massive loss of income to EA, solicitors, surveyors and mortgage brokers when house prices drop and house sale volumes plummet.

It took me twice as long as it should have to read your message as I was distracted and disturbed by your avatar.

You make a very good point though. The amount of employment dependant on building and trading of property is very significant.

[South Lorne]

I think the B of E need to review this analysis from Q1 2007 as there has been a slight change in the economic weather forecast for householders:

It argues that the extent to which

levels of household debt affect the outlook for the economy and the way in which the economy

responds to unexpected developments, depends on the circumstances of individual borrowers and

lenders, as well as wider economic conditions. Recent evidence suggests that there has been little

difference in the amount by which the spending of high and low debt households has responded to

changes in those households’ financial position. This is likely to be because the benign economic

environment and favourable lending conditions have made it easier for households to smooth over

adverse shocks. Nevertheless, adverse interactions between debt, house prices and consumption

could arise in other circumstances. As such, there is a need to keep this situation under review by

continued monitoring of household and lender balance sheets.

http://www.bankofengland.co.uk/publication...in/qb070105.pdf