UK blows ?12bn remortgage

Homeowners are spening more than £4 billion a month on consumer goods - like cars, DVD players and luxury TVs - with money borrowed against their rising house prices.

This 'mortgage equity withdrawal' is out of control and responsible for two in every three pounds of the growth in consumer spending this year, say HSBC economists.

But Britain's property-fuelled spending boom is beginning to suffocate an unbalanced real economy and requires government action to 'dampen it down and prevent potentially damaging consequences', say influential business groups.

The Engineering Employers Federation is disturbed that this spending surge prevented the Bank of England Monetary Policy committee cutting base rates last week, despite a slump in manufac turing production in October.

HSBC calculates that £12.5bn was extracted by homeowners from the rising value of property in the three months between July and September and it is 'being spent fast on big ticket items'. This represents a 25 per cent increase on the Bank of England figures of £10bn for the previous quarter. Retailers of cars and expensive consumer durables have been the biggest beneficiaries of this method of financing.

The seasonal spending boom is likely to see this borrowing against higher house prices increase again. Total spending due to mortgage equity withdrawal will exceed 5 per cent of GDP this year. When combined with personal loans these forms of easy credit are financing 11 per cent of consumer spending, the highest proportion on record, with the exception of the third quarter in 1988.

'Although mortgage equity withdrawal has risen to a record high, there are few constraints on it rising even further over the next few months. This represents a gamble that is likely to backfire' says John Butler, UK economist at HSBC.

Bank of England sources have warned that the principal concern of the Monetary Policy Committee is not house price rises in themselves, but that free-spending consumers have already banked these increases, suggesting possible pain during a house price correction.

A Bank paper from last year shows that Britain's liberalised mortgage market is the easiest place in the world to remortgage.

'The likely outcome is that consumer spending will slow aggressively and then grow below trend for a sustained period of time,' says Butler.

But consumers show no sign of reducing their spending habit as the busiest shopping days of the year approach. Last week the Halifax reported that house prices rose by an annual rate of 29.2 per cent to November. At this rate a house bought in November 2001 will have doubled in value by February 2005.

'The effect of the escalating housing market on the economy has now reached the stage where it demands action from the Government to dampen it down and prevent potentially damaging consequences for the economy,' said Martin Temple of the Engineering Employers Federation.