November 2010. Recently I’ve talked about the rebalancing that is
underway in our economy as a result of people spending less and saving
This chart shows whether, at an aggregate level, households are injecting or withdrawing equity from their homes.
It does this by looking at the amount that households are spending on
new housing or renovations, and comparing that with the change in the
value of mortgages being secured against the housing stock.
When the increase in mortgages is greater than the new investment in
housing, this is effectively an equity withdrawal. An example of this is
if you increase your mortgage to pay for a holiday. Conversely, when
the new investment in housing is larger than the increase in mortgages,
this is an equity injection. An example of this is if you fund your
renovations from saving rather than increasing your mortgage.
The chart shows that households undertook a massive equity withdrawal
in the middle of the last decade, peaking at over $7 billion in the
year to June 2007.
There was a significant change in behaviour after that. Households
moved sharply from funding via borrowing to saving, with the equity
injection in the year to March 2009 being almost $5 billion.
This turnaround is equivalent to about a 10% reduction in incomes, in terms of household spending.
This is why we are not experiencing a consumption/retail led upturn.