People can’t wait to pay off mortgages

Over £7.3 billion was increased in owner’s equity the past three months of 2010 says the Bank of England this recorded as the largest injection of cash since 1970. This is sharply different than the same period three years ago when over £6 billion was released from their properties in order to fund large purchases. That was the lowest in a six year period and followed consistent withdrawals since 1998.

Consumers are not spending their money on high street and that is prompting fears about the already fragile economy since homeowners have dramatically reversed the trend. Global Insight economist, Howard Archer said that consumers want to reduce their debt and one way to do so is to reduce the debt they owe on their homes.

This in the long run is good for the economy and another reason to think that spending by consumers will fall again as we move forward, but it makes the economy less vulnerable in the short term.  If consumers do not continue to spend then it will hurt the economy since spending is only 65% of Britain’s income thus the economy cannot grow.

Additionally the poor returns on savings have added to consumers paying more of their spare cash on the debt on their houses. Home owners are paying a reduced amount on their mortgages since the Bank of England has kept the interest rates at record lows and they are using the additional cash to pay down the principal of the loan itself.

Royal Institution of Chartered Surveyors chief economist Simon Rubinsohn said that equity withdrawal has played a role in sustaining high street spending since it is the cheapest way to borrow but the lack of purchasing power going forward will contribute to a very flat economy performance this year in the economy.

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