Description
The purpose of this paper is to explore the changing role of housingwealth froman investment
vehicle to a welfare resource. It also considers the implications of economic prosperity and decline in theUK
on homeowners, intentions of equity withdrawal, and the consequences of managing household budgets.
Journal of Financial Economic Policy
Recession and housing wealth
Beverley Searle
Article information:
To cite this document:
Beverley Searle, (2011),"Recession and housing wealth", J ournal of Financial Economic Policy, Vol. 3 Iss 1
pp. 33 - 48
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Craig A. Depken, Harris Hollans, Steve Swidler, (2011),"Flips, flops and foreclosures: anatomy
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Recession and housing wealth
Beverley Searle
Centre for Housing Research, The Observatory, Buchanan Gardens,
The University of St Andrews, St Andrews, UK
Abstract
Purpose – The purpose of this paper istoexplore the changingrole of housingwealthfromaninvestment
vehicle to a welfare resource. It also considers the implications of economic prosperityanddecline inthe UK
on homeowners, intentions of equity withdrawal, and the consequences of managing household budgets.
Design/methodology/approach – The paper takes the form of a quantitative longitudinal analysis
of national data and panel survey, including random effects logistic regression model.
Findings – Housing wealth is increasingly being used as a ?nancial safety net across the life course.
Homeowners are equally likely to have engaged in equity-borrowing episodes during periods of economic
prosperity as they are during periods of decline; particularly, lone parents with non-dependent children and
unemployedpeople. Housingtendsto be usedas alast resort once other forms of credit have beenexhausted.
Research limitations/implications – There are data constraints; equity withdrawal can only be
calculated from 1994 and the latest wave of data available is 2008. The research is not therefore able to
consider the full extent of the consequences of the current recession, however, it does provide an
indication of the problems that may emerge.
Social implications – Social implications arise from the concentration of resources into housing
wealth; homeowners may suffer through having increased debt and there are implications for ?nancial
and sustainable welfare policy where home ownership is positioned as a nation’s welfare resource.
Originality/value – The paper draws upon the author’s recent work (in collaboration with others)
which offers insights into the motivations for equity borrowing. This paper offers an original
contribution through presenting empirical evidence on the effect of economic prosperity and economic
decline on householdbehaviour, andadds newinsights in respect of the implications for households who
rely on housing wealth in the context of the current recession.
Keywords Housing, Wealth and income, Recession, United Kingdom
Paper type Research paper
1. Introduction
The booms and busts of economic cycles have implications not only for the events or
shocks that households encounter, but also for the means available to manage
household budgets in the aftermath. In recent years, the role of housing wealth has
become increasingly prominent, particularly, in the wake of the 2007 ?nancial crises
which had the housing market at the epicentre (Vaitilingam, 2009). Whilst the focus of
this attention has been on the marketing and speculation associated with housing
?nancial products, another, often overlooked, element is a signi?cant change in howwe
view and use the wealth (or equity) stored in our homes.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
The BHPS is made available through the Economic and Social Research Council (ESRC) Data
Archive. The data were originally collected by the ESRC Research Centre on Micro-Social
Change at the University of Essex. The ?ndings and views reported in this paper are those of the
authors and should not be attributed to the University of Essex.
The author is grateful to Daisy McGregor at the Reserve Bank of Australia for providing
?gures on Housing Equity Injection in Australia. The author is also grateful for the insightful
comments from an anonymous referee, and for the support and guidance from Steve Swidler.
Recession
and housing
wealth
33
Journal of Financial Economic Policy
Vol. 3 No. 1, 2011
pp. 33-48
qEmerald Group Publishing Limited
1757-6385
DOI 10.1108/17576381111116867
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For many years, owner-occupiers (and their offspring) envisaged the family home as
an investment vehicle, gradually paid off over the life course to provide a nest egg for
retirement and inheritance for the next generation. This traditional view of housing
wealthis, however, changing. The deregulationof the ?nancial sector across manyOECD
nations during the 1980-1990s opened up opportunities for new mortgage markets and
products. These newproducts provideda range of ?exible features enablinghomeowners
to not only overpay their mortgage to clear loans sooner, but also to access their housing
wealth through increasing their mortgage debt (up to an agreed limit) without the
expense or administrative burden of remortgaging or moving home (Smith et al., 2002,
2007a; Smith and Searle, 2008). Whilst a growing proportion of homeowners is taking
advantage of suchproducts little is known about the motivation for increasing household
debt in this way; nor the consequences for managing household budgets.
This paper aims to address some of these issues, building on a line of argument
developed in previous work (Searle et al., 2009b; Smith et al., 2007a), it looks at the
changing ?nancial and welfare role of housing wealth. First, it will discuss the changing
global economic climate and the implications for households’ wealth accumulation and
?nancial management; second, it considers the micro-economic consequences of
economic recession on household’s management of housing debt; policy implications are
then discussed and conclusions drawn in the ?nal section.
2. Housing wealth in a changing climate
Whilst an“of?cial” de?nition of recessionis open to debate, there is a general recognition
that it depicts a period of decline in economic activity (Claessens and Kose, 2009;
Vaitilingam, 2009) in one or more sectors of the economy (Learner, 2008). Using a widely
accepted de?nition of two quarters of negative growth since 2007, there has been a
signi?cant decline in economic activity on a global scale with GDP falling 23.5 per cent
across OECD countries in 2009 (Figure 1).
Figure 1.
Real GDP; percentage
change from previous year
Total OECD
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
The Netherlands
New zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
15.0
10.0
5.0
Source: OECD Economic Outlook 86 Database, Annex Table 1
%
c
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G
D
P
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
–5.0
–10.0
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According to the IMF de?nition – ten or more of the 21 advanced economies being in
recessionat the same time – inthe past 50 years, there have beenfour highlysynchronised
(global) recessions: 1975, 1980, 1992, and 2008 (IMF, 2009). A key difference with the
current, compared to previous, global recession, however, is the role of housing; in
particular the changing nature of mortgage markets and homeowner’s willingness to dip
into their housing wealth. As Figure 2 (the USA), Figure 3 (the UK), and Figure 4
(Australia) show, there are clear links between national GDP, home prices and cash-out
re?nancing (or equity borrowing).
Figure 2.
Home Price Index, GDP
and cash-out re?nancing
USA (1993-2009)
100.0
8.5
GDP quarterly %
change based on
chained 2005 dollars
(right axis)
Source: Bureau of Economic Analysis, National Economic Accounts, Freddie Mac, Conforming Loans,
S&P Case-Shiller Index
Total home equity
cashed out ($bn) (left
axis)
S&P/Case-Shiller home
price index (Jan
2000=100) (right axis)
6.5
4.5
2.5
0.5
%
c
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–1.5
–3.5
–5.5
–7.5
80.0
60.0
40.0
20.0
0.0
$
(
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–20.0
–40.0
–60.0
1
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–80.0
Figure 3.
Home price change and
mortgage equity
withdrawal UK
(1990-2009)
1
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–1.0
–2.0
–3.0
GDP qrt% change
based on chained
2005 pounds (right
axis)
Source: Bank of England, Halifax House Price Index, ONS
Housing equity
withdrawal, (£bn)
(left axis)
Halifax house price
index qrt% change
(Jan 2000=100)
(right axis)
%
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Recession
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35
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Following the previous global recession in 1992, home prices were slow to recover with
negative growth in Q1-Q2 1995 in the USA and Q2 1994 to Q3 1995 in the UK; equity
borrowing was also in its infancy during this period. More important, however, is what
happened during the prosperous economic climate which followed. At their peak
house prices were raising at 4-6 per cent a quarter in the USA and the UK and
average quarterly withdrawals of home equity reached $80bn throughout 2006
(£14bn throughout 2003). Although the data for Australia re?ect net volume of equity
withdrawal/injection, there is still a clear indication that overall during the boom of
the 2000s Australian’s were withdrawing equity (peaking at $A9.1bn in Q3 2003).
Homeowners had therefore come to rely on a signi?cant ?nancial resource prior to the
downturn.
This rapid increase in household leverage in the USAbetween 2002 and 2006 among
existing homeowners – who took advantage of low interest rates and raising prices to
extract equity – according to Mian and Su? (2009b) was the primary cause of the
2007 global recession. Overstretched households struggling to maintain their housing
payments led to raising household default rates and declining home prices as early as Q2
2006 (20.2 per cent). The response from the credit and ?nancial markets resulted in a
long cycle of household de-leveraging, with the subsequent impact on the real economy
emerging nearly two years later when GDP growth turned negative during 2008.
This presents a worrying picture; recessions rooted in ?nancial market problems –
the acceleration of both credit and debt – are often more costly than others, and may be
particularly detrimental where these coincide with globally synchronized recessions
which tend to be deeper and longer (Claessens and Kose, 2009). The impact that cycles
Figure 4.
Home price change and
housing equity
withdrawal Aus
(1990-2009)
1
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–4.0
GDP qrt% change
based on chained
$Aus 2007/8 (right
axis)
Housing equity
withdrawal ($Aus
bn) (left axis)
Note: Housing equity injection is calculated at the macro-level using data from ABS, RBA and
Australian Property Monitors: the values have been reversed so that a negative value indicates an
overall injection of equity and a positive value indicates an overall withdrawal of equity
Source: Reserve Bank of Australia (RBA), Statistical Table G10, Australian Bureau of Statistics
(ABS), Table 6416.0, and see note 1
House price index
qrt% change (Av 8
capital cities) (right
axis)
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in housing markets have on household borrowing behaviour and the subsequent and
detrimental impact this had onthe real economyin2008, demonstrates howessential it is
for economists to gain a better understanding of the motivations of homeowners to
engage in the potentially volatile risk of increasing household debt.
3. Mortgage equity withdrawal – setting the scene
Traditional broadcategories of national surveys have historicallymade it dif?cult tomake
international comparisons on home equity withdrawal, however, new research is
beginning to address this shortcoming, through exploring the circumstances of those who
dip into their housing wealth. A limited but growing body of evidence from the USA,
the UK and Australia (among others) suggests that housing wealth – or more precisely
equity borrowing – is increasingly featuring in homeowners ?nancial planning. This
initially came to light in research fromthe UK(Smith et al., 2007a) which drewattention to
the welfare role of housing wealth; many homeowners recalled experiences where housing
wealth provided a buffer through periods of ?nancial dif?culty (unemployment,
relationship dissolution) or to meet unexpected costs (including health care).
These qualitative insights have been supported by quantitative analysis which show
the proportion of homeowners equity borrowing is increasing and the amounts of equity
being released are substantial (Smith and Searle, 2008); on average £7,500 ($26,000)
released annually in the UK (Australia) between 2001 and 2005 (Parkinson et al., 2009),
with around 25-30 cents on each additional dollar of home equity being borrowed between
2002 and 2006 in the USA (Mian and Su?, 2009a).
While research in the UK (Attanasio et al., 2005) and the USA (Case et al., 2005) has
shown that raising home prices are associated with raising consumption – what is
known as wealth effects – what these studies do not show, and indeed what is dif?cult to
recover fromnational datasets – is exactlywhat goods and services are beingconsumed.
In the USA, for example, analysis points towards “real outlays”, i.e. consumption or
home improvements (Mian and Su?, 2009a), or to cover rapidly growing tuition fees
(Masnick et al., 2006) although precise details are lacking. In the UK, there is a notable
decline in funds being channelled into home extensions and repairs with a corresponding
raise in “other” (non-recoverable) items (Smith and Searle, 2008)[1]. As noted above,
initial qualitative insights into what this “other” may include point towards a welfare
provision (Smith et al., 2007a) or “care-full” (Searle et al., 2009a, p. 13) consumption as
owners use their equity to support family members. Quantitative studies in the UK
(Benito, 2007; Parkinson et al., 2009) and the USA (Hurst and Stafford, 2004) are also
showing that home equity may be performing the role of a ?nancial buffer. In summary,
what this research shows is that the storing and consumption of housing wealth is no
longer in line with the long-standing and popular “life cycle” approach (Ando and
Modigliani, 1963) but is more akin to a “precautionary savings” (Skinner, 1996) or
“wealth-fare” insurance model (Parkinson et al., 2009; Wood et al., n.d.); homeowners are
more able and willing, and indeed may need to use their housing wealth to smooth out
disruptions to the household balance sheet at any point across the life course.
Much of this research, however, was conducted through a period of economic
prosperity, given that housing wealth is a ?nancial buffer during the economic highs –
that even in prosperous times homeowners struggle to cope with shocks to the
household purse – this begs the question what is the role of housing wealth, and equity
borrowing, during economic lows? The rest of this paper will compare household
Recession
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37
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behaviour during this prosperous period with the last two recessions in the UK; the early
1990s when equity withdrawal was to some extent still in its infancy, and the late 2000s
when equity withdrawal had become a more routine activity among homebuyers. The
analysis builds on the work reported above, and in particular draws upon the
methodology developed by Parkinson et al. (2009) and Searle et al. (2009a).
4. Mortgage equity withdrawal through booms and busts
The data for the analysis are drawn from the British Household Panel Survey
(BHPS); a nationally representative sample of around 5,500 British households when it
commenced in 1991. Increased household samples for Scotland and Wales (1999) and an
additional sample from Northern Ireland (2001) extended coverage to the whole of
the UK, and raised the sample size to around 10,500 households (20,000 individuals).
Individuals are reinterviewed each year, members of original households who move are
followed, and people who join existing households, or who reach the age of 16, are added
to the sample.
Using this data presents two key limitations. First, changes in mortgage debt can
only be calculated from 1994, however, as discussed below the social and economic
consequences of the 1990-1992 recession were still being borne out. Second, data are
currently only available for 2008. However, pooling the data fromthe end of the boomto
the start of the bust is possible, and by comparing the two periods it may be possible to
speculate on the potential impact and implications for households’ ?nancial welfare as
they manage micro-economic shocks in the context of macro-economic ?uctuations.
In this analysis, the sample frame is based on homeowners who are the reference
person[2] and their partners where appropriate. There are several channels through
which equity may be accessed including downsizing or selling up, however, as the focus
of this analysis is on mortgage equity withdrawal, two further selection criteria are used:
homeowners who were resident at the same address in two consecutive waves, and for
whom mortgage debt (including no debt) is recorded. This enables the calculation of
changes in mortgage debt which have not been driven by a property transaction, but
have been instigated by some other need. Using these criteria produces a sample of
13,599 homeowners (contained in 8,890 households). These data have been pooled to
create an unbalanced[3] person period dataset, where each calendar year is treated as a
single episode during which a homeowner has the option to withdrawequity. The unit of
analysis here is an episode (calendar year) and not individual homeowner, giving a
sample size of 84,917 individual episodes (51,658 household episode).
Changes in mortgage debt are calculated by subtracting the previous year’s total
outstanding mortgage from the current year. This gives raise to three sub-groups:
mortgage debt stays the same, decreases, or increases. The ?rst two are identi?ed as
people who have not withdrawn equity (equity savers); the third group is those who
have withdrawn equity (equity borrowers)[4]. The following analysis compares
the circumstances of equity savers and equity borrowers and considers the
consequences of sustaining increased housing debt.
First, looking across the period from 1994 to 2008, Table I shows among the total
sample of owner-occupiers (n ¼ 13,599) whilst only 47.2 per cent have not withdrawn
equity at any point (equity savers), over half (52.8 per cent) of the sample have
withdrawn equity in one or more years surveyed (equity borrowers). Among those who
equity borrow 42 per cent (n ¼ 3,034) are one-off events, the remaining 58 per cent
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(n ¼ 4,144) are serial borrowers the majority of whomhave withdrawn equity on two or
three occasions (n ¼ 2,902), with up to 90 homeowners withdrawing equity at least
seven times between 1994 and 2008.
Table II shows the propensity for equity borrowing during periods of economic
growth and decline. The UK has experienced two economic recessions during the last
decade; 1990-1992 and 2008-2009. However, it is acknowledged that the social costs of
economic downturns extend far beyond “of?cial” periods based on negative (GDP)
growth. As discussed above home prices were still falling after the 1992 global recession
in the USA and the UK. Unemployment rates also lagged recovery in the economy not
returning to their pre- Q1 1990 recession level until Q3 1996 (5.3 per cent) in the USAand
Q3 1997 (6.8 per cent) in the UK. Taking these factors into account and given the
limitations of data available, the pooled data have been combined into two periods:
economic prosperity (1998-2006; n ¼ 56,165) and economic decline (1994-1997 and
2007-2008; n ¼ 28,752). The data indicate that homeowners are equally likely to have
engaged in equity borrowing episodes during periods of economic prosperity
(19 per cent) as they are during periods of decline (18 per cent), suggesting there are
some circumstances which put suf?cient demands on household ?nances and the need
to withdraw equity irrespective of wider economic conditions.
These circumstances are analysed using a random effects logistic regression model.
The model does not speci?cally aimto identify those circumstances which may increase
or detract from people’s likelihood of withdrawing equity, this is being developed in
detail elsewhere (Wood et al., n.d.), however, it does draw upon this work to control for
factors which are linked with the propensity for equity borrowing, with the aim of
identifying the behaviour of those who are most likely to borrow from their housing
equity during periods of economic prosperity and decline. The reference categories are
therefore those groups which are among those least likely to withdraw equity (this is
con?rmed through a series of regression models, results not shown); single person
households, individuals who are single and have never been married, and those who are
not in the labour force (NILF) (e.g. retired, family care, long-term sick). The results are
shown in Table III.
Model 1 controls for household type and relationship status, it shows,
as demonstrated elsewhere (Parkinson et al., 2009), how the demands of a growing
family impact on equity borrowing. During periods of “economic prosperity”,
Prosperity Decline
n % n %
Equity saving 45,418 81 23,589 82
Equity borrowing 10,747 19 5,163 18
Total 56,165 100 28,752 100
Table II.
Equity borrowing and
economic cycles
(1994-2008)
n %
Equity savers 6,421 47.2
Equity borrowers 7,178 52.8
Total 13,599 100.0
Table I.
Proportion of equity
borrowers and equity
savers 1994-2008
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P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
4
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
E
c
o
n
o
m
i
c
p
r
o
s
p
e
r
i
t
y
(
n
¼
4
2
,
8
1
6
;
g
r
o
u
p
s
¼
9
,
7
2
2
)
E
c
o
n
o
m
i
c
d
e
c
l
i
n
e
(
n
¼
1
4
,
7
1
1
;
g
r
o
u
p
s
¼
7
,
5
3
7
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
H
o
u
s
e
h
o
l
d
a
n
d
r
e
l
a
t
i
o
n
s
h
i
p
C
o
u
p
l
e
1
.
2
3
(
0
.
2
1
)
1
.
2
7
(
0
.
2
2
)
1
.
3
4
(
0
.
2
3
)
0
.
3
3
(
0
.
0
8
)
*
*
*
0
.
3
3
(
0
.
0
7
)
*
*
*
0
.
3
3
(
0
.
0
8
)
*
*
*
1
.
8
7
(
0
.
3
3
)
*
*
*
2
.
0
9
(
0
.
3
6
)
*
*
*
2
.
1
3
(
0
.
3
7
)
*
*
*
0
.
4
8
(
0
.
1
0
)
*
*
0
.
5
2
(
0
.
1
1
)
*
*
0
.
5
2
(
0
.
1
1
)
*
*
C
o
u
p
l
e
þ
n
o
n
-
d
e
p
c
h
i
l
d
1
.
8
1
(
0
.
3
2
)
*
*
1
.
7
2
(
0
.
3
1
)
*
*
1
.
7
8
(
0
.
3
1
)
*
*
0
.
5
0
(
0
.
1
1
)
*
*
0
.
4
6
(
0
.
1
0
)
*
*
0
.
4
6
(
0
.
1
0
)
*
*
L
o
n
e
p
a
r
e
n
t
1
.
4
9
(
0
.
1
6
)
*
*
*
1
.
7
5
(
0
.
0
2
)
*
*
*
1
.
6
7
(
0
.
1
8
)
*
*
*
1
.
0
1
(
0
.
1
8
)
1
.
2
3
(
0
.
2
2
)
1
.
1
2
(
0
.
2
0
)
L
o
n
e
p
a
r
e
n
t
þ
n
o
n
-
d
e
p
c
h
i
l
d
1
.
6
4
(
0
.
2
2
)
*
*
*
1
.
5
5
(
0
.
2
0
)
*
*
*
1
.
5
2
(
0
.
2
0
)
*
*
1
.
6
4
(
0
.
3
3
)
*
1
.
5
1
(
0
.
3
0
)
*
1
.
4
3
(
0
.
2
9
)
S
i
n
g
l
e
p
e
r
s
o
n
(
r
e
f
.
)
C
o
n
t
i
n
u
o
u
s
r
e
l
a
t
i
o
n
s
h
i
p
1
.
0
5
(
0
.
2
0
)
1
.
0
4
(
0
.
1
9
)
0
.
9
9
(
0
.
1
9
)
3
.
8
2
(
0
.
9
4
)
*
*
*
3
.
8
1
(
0
.
9
4
)
*
*
*
3
.
8
2
(
0
.
9
5
)
*
*
*
I
n
a
r
e
l
a
t
i
o
n
s
h
i
p
1
.
0
4
(
0
.
2
1
)
1
.
0
6
(
0
.
2
1
)
0
.
9
9
(
0
.
2
0
)
3
.
6
0
(
0
.
9
4
)
*
*
*
3
.
8
9
(
1
.
0
1
)
*
*
*
3
.
7
1
(
0
.
9
7
)
*
*
*
R
e
p
a
r
t
n
e
r
e
d
1
.
5
0
(
0
.
3
0
)
*
1
.
3
3
(
0
.
2
6
)
1
.
2
7
(
0
.
2
5
)
4
.
5
6
(
1
.
1
8
)
*
*
*
4
.
1
4
(
.
0
8
)
*
*
*
4
.
0
3
(
1
.
0
5
)
*
*
*
S
e
p
a
r
a
t
e
d
1
.
6
7
(
0
.
2
2
)
*
*
*
1
.
5
3
(
0
.
1
9
)
*
*
1
.
4
6
(
0
.
1
8
)
*
*
1
.
7
7
(
0
.
3
8
)
*
*
1
.
6
5
(
0
.
3
5
)
*
1
.
5
7
(
0
.
3
4
)
*
D
i
v
o
r
c
e
d
1
.
6
3
(
0
.
1
9
)
*
*
*
1
.
4
5
(
0
.
1
6
)
*
*
1
.
4
0
(
0
.
1
5
)
*
*
1
.
8
3
(
0
.
3
2
)
*
*
1
.
7
3
(
0
.
3
0
)
*
*
1
.
6
6
(
0
.
2
9
)
*
*
W
i
d
o
w
e
d
0
.
4
7
(
0
.
0
7
)
*
*
*
0
.
5
1
(
0
.
0
8
)
*
*
*
0
.
5
2
(
0
.
0
8
)
*
*
*
0
.
4
8
(
0
.
1
2
)
*
*
0
.
5
2
(
0
.
1
3
)
*
*
0
.
5
5
(
0
.
1
3
)
*
N
e
v
e
r
m
a
r
r
i
e
d
(
r
e
f
.
)
E
m
p
l
o
y
m
e
n
t
a
n
d
w
e
a
l
t
h
C
o
n
t
i
n
u
o
u
s
l
y
e
m
p
l
o
y
e
d
1
.
8
1
(
0
.
0
9
)
*
*
*
1
.
8
5
(
0
.
0
9
)
*
*
*
1
.
4
9
(
0
.
1
1
)
*
*
*
1
.
5
2
(
0
.
1
2
)
*
*
*
E
m
p
l
o
y
e
d
1
.
5
4
(
0
.
0
9
)
*
*
*
1
.
5
6
(
0
.
0
9
)
*
*
*
1
.
4
4
(
0
.
1
2
)
*
*
*
1
.
4
6
(
0
.
1
2
)
*
*
*
R
e
e
m
p
l
o
y
e
d
1
.
5
0
(
0
.
0
9
)
*
*
*
1
.
5
1
(
0
.
0
9
)
*
*
*
1
.
3
4
(
0
.
1
3
)
*
*
1
.
3
5
(
0
.
1
3
)
*
*
U
n
e
m
p
l
o
y
e
d
1
.
6
4
(
0
.
2
2
)
*
*
*
1
.
5
1
(
0
.
2
0
)
*
*
1
.
6
0
(
0
.
3
0
)
*
1
.
4
6
(
0
.
2
8
)
*
N
I
L
F
(
r
e
f
.
)
R
e
c
e
i
v
e
s
i
n
c
o
m
e
f
r
o
m
r
e
n
t
a
l
p
r
o
p
e
r
t
y
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
E
q
u
i
v
a
l
i
s
e
d
g
r
o
s
s
h
o
u
s
e
h
o
l
d
i
n
c
o
m
e
/
£
1
,
0
0
0
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
L
a
g
g
e
d
h
o
u
s
i
n
g
e
q
u
i
t
y
/
£
1
0
,
0
0
0
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
1
.
0
0
(
0
.
0
0
)
M
o
n
t
h
l
y
s
a
v
i
n
g
s
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
(
c
o
n
t
i
n
u
e
d
)
Table III.
Equity borrowing during
economic prosperity
and decline
JFEP
3,1
40
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
4
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
E
c
o
n
o
m
i
c
p
r
o
s
p
e
r
i
t
y
(
n
¼
4
2
,
8
1
6
;
g
r
o
u
p
s
¼
9
,
7
2
2
)
E
c
o
n
o
m
i
c
d
e
c
l
i
n
e
(
n
¼
1
4
,
7
1
1
;
g
r
o
u
p
s
¼
7
,
5
3
7
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
F
i
n
a
n
c
i
a
l
c
i
r
c
u
m
s
t
a
n
c
e
s
C
o
m
f
o
r
t
a
b
l
e
(
r
e
f
)
G
e
t
t
i
n
g
b
y
/
h
a
v
i
n
g
d
i
f
?
c
u
l
t
y
1
.
2
0
(
0
.
0
4
)
*
*
*
1
.
2
1
(
0
.
0
7
)
*
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
(
t
2
1
)
1
.
0
8
(
0
.
1
8
)
1
.
5
9
(
0
.
3
9
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
(
t
2
1
)
1
.
0
2
(
0
.
1
0
)
1
.
1
0
(
0
.
1
5
)
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
(
t
2
1
)
1
.
6
4
(
0
.
3
4
)
*
1
.
0
7
(
0
.
2
7
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
1
.
2
0
(
0
.
2
0
)
1
.
7
9
(
0
.
4
7
)
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
1
.
4
0
(
0
.
1
4
)
*
*
1
.
8
3
(
0
.
2
6
)
*
*
*
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
1
.
1
3
(
0
.
2
4
)
1
.
0
2
(
0
.
3
2
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
(
t
þ
1
)
0
.
8
1
(
0
.
1
4
)
0
.
1
2
(
0
.
1
3
)
*
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
(
t
þ
1
)
1
.
5
6
(
0
.
1
6
)
*
*
*
1
.
1
0
(
0
.
1
6
)
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
(
t
þ
1
)
1
.
3
9
(
0
.
3
0
)
1
.
0
6
(
0
.
3
5
)
W
a
l
d
x
2
2
,
7
6
2
.
3
5
*
*
*
3
,
1
9
5
.
0
2
*
*
*
3
,
3
0
4
.
0
2
*
*
*
9
3
3
.
2
4
*
*
*
1
,
0
1
0
.
6
5
*
*
*
1
,
0
5
3
.
1
4
*
*
*
L
i
k
e
l
i
h
o
o
d
r
a
t
i
o
t
e
s
t
o
f
p
¼
0
3
9
6
.
9
0
*
*
*
2
2
9
.
0
2
*
*
*
2
0
7
.
7
4
*
*
*
7
.
0
5
*
*
3
.
3
7
*
2
.
8
6
*
N
o
t
e
s
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
p
,
0
.
0
5
,
*
*
p
,
0
.
0
1
a
n
d
*
*
*
p
,
0
.
0
0
1
;
c
o
n
t
r
o
l
s
:
a
g
e
,
g
e
n
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e
r
,
c
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s
t
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m
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a
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q
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v
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i
s
e
d
h
o
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s
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h
o
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o
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m
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l
u
s
t
e
r
m
e
a
n
l
a
g
g
e
d
e
q
u
i
t
y
Table III.
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compared to single person households, households with children have signi?cantly
higher odds of withdrawing equity; being nearly double among couple households with
dependent children (OR ¼ 1.87; p , 0.001) and non-dependent children (OR ¼ 1.81;
p , 0.001); and around 50 per cent more likely among lone parents (OR ¼ 1.49;
p , 0.001 and OR ¼ 1.64; p , 0.001, respectively). During periods of economic decline,
however, the odds of equity borrowing are signi?cantly lower; being half as likely for
couples with dependent and non-dependent children (0.50; p , 0.01). However, among
lone-parent households, the odds of equity borrowing are still higher than single person
households, particularly, among lone parents with non-dependent children – here the
odds are the same as during prosperous times (1.64; p , 0.05). Whilst the needs of
children still place demands on household budgets irrespective of wider economic
cycles, it would appear that some couple households are able to manage demanding
spending needs through other means. Among lone parents, however, there may be some
dif?culty adjusting the household budget once children become independent and
bene?ts and tax credits are withdrawn.
Disruption to relationships also presents a motivation for equity borrowing during
economically prosperous times where compared to those who have never been married
the odds of borrowing increase by 50 per cent or more among those who have
repartnered (1.50; p , 0.05), separated (1.67; p , 0.001), or divorced (1.63; p , 0.001).
What is striking, however, is how the odds increase substantially among all groups
during periods of economic decline, and that the independent in?uence that relationship
dissolution has on equity borrowing remains throughout the models, even once
employment, wealth and debt problems are controlled for. Among those who have
experienced the dissolution of a relationship, this could be an indication of the expense
associated with establishing a new relationship and household; or people releasing
equity in anticipation of legal and other expenses associated with divorce. The
consistently increased odds during periods of economic decline compared to prosperous
economic periods may also be an indication of the increased likelihood of the breakdown
of a relationship during periods of recession (Blekesaune, 2008). Some of this increase,
however, may also be in anticipation of dif?cult times ahead. Those in stable
relationships (including those who have yet to experience a relationship dissolution)
may feel suf?ciently secure to bring forward debt where the risk of repayment is shared
across two incomes, or at least one income until the economy recovers.
Model 2 aims to capture some of this instability of incomes through controlling for
employment status and household wealth. The model shows that wealth resources (from
incomes or the amount of equity in the home) have a relatively small but signi?cant
in?uence on homeowners’ decisions of equity borrowing during periods of economic
prosperity. There is a 1 per cent increase in the odds of equity borrowing for every
additional £10,000 in home equity or £1,000 in household income. This may re?ect the
con?dence of homeowners in sustaining increased debt, or indeed having the additional
resource to call upon, whilst economies are booming. Although the positive effect of
incomes remain when the economy is in decline, the effect of housing equity becomes
negligible and loses signi?cance; it would appear that when recession takes hold the
value of property (which may be declining across the board) becomes less important;
those who need to withdraw equity are driven by pressing needs, irrespective of the
resource stored in their home.
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Employment status, however, has a signi?cant impact on equity borrowing. When
compared to those who are NILF, the likelihood for equity borrowing is signi?cantly
higher – the odds being nearly twice those who are continuously employed throughout
the period observed. This lends further support to the changing role of housing wealth
from a nest egg for retirement towards a wealth-fare or insurance role across the life
course. The model also shows that generally the odds of equity borrowingtendto decline
the further away people become from secure employment and they also decline during
periods of economic recession. This is perhaps to be expected as incomes become less
secure and the ability to service additional mortgage debt declines. The exception,
however, is unemployment, among whom the odds of equity borrowing are not only
higher than those who are employed currently (but will leave the labour market at some
point), but also those who have subsequently become reemployed. Furthermore, during
periods of economic recession, people are still motivated to increase mortgage debt even
in times when their prospects of employment may be declining rather than increasing.
As speculated elsewhere, those who anticipate redundancy or future unemployment
may borrow-up in anticipation of a period of reduced income (Wood et al., n.d.). It may
also be a re?ection of the dif?culty some household’s face in adjusting to a sudden
reduction in income, and the need to call in other available wealth resources.
This evidence suggests that on the one hand, households are able to manage their
?nances through recession by drawing upon other resources (savings or investments) or
despite pressing spending needs are able to manage ?nances through making cuts in
other household budgets. On the other, some households may have no alternative but to
draw down their housing safety net. The ability to manage household ?nances during
economic peaks and troughs may then be a re?ection of households’ overall economic
resources. On average, those who withdraw equity had higher incomes (£22,009) than
those who do not (£18,741) and this holds true irrespective of which period equity is
withdrawn. However, when decisions are taken about equity borrowing, it is likely that
households will consider their wider wealth resources. In the years, data are available on
average those who have diverse portfolios (for example, have other investments) are less
likely to withdrawequity than those who do not have this ?nancial resource (£6,806 and
£3,226, respectively). For those who do not have alternative resources, it may be that
equity borrowing comes at the end of a series of credit options; equity borrowers
reported on average twice as much non-housing debt as equity savers (£2,660 and
£1,223, respectively). The data also point towards a worrying trend of increasing debt
among equity borrowers with average non-housing debt (£3,674) exceeding levels of
investment (£3,459) by 2005 (Figure 5).
This indicates that among this sample of homeowners ?nancial resources are
increasingly likely to be contained in their housing basket, making homeowners more
vulnerable to the vagaries of the housing market (Smith et al., 2009), whilst debt is more
likely to become dispersed. These ?ndings support evidence from the USA which also
demonstrates that despite home-equity-based borrowing being more prominent among
homeowners with high credit card utilization, funds are not used to pay down credit card
debt (Mian and Su?, 2009b). This would imply that equity borrowing is not motivated as
a means of managing household budgets through consolidating debt into one
manageable (mortgage) pot, but because there is no alternative; ?nancial portfolios are
becoming less diverse and other forms of credit have been exhausted.
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Of further concern is that households may have to “rob Peter to pay Paul” in order to
balance the household budget. Model 3 captures this through controlling for
households ?nancial circumstances during the period before equity borrowing has
occurred (t
21
), the year in which households withdrew equity and the year following
the withdrawal of equity (t
þ1
). First, the model lends support to a key ?nding to
emerge from both qualitative and quantitative research in that people are more likely
to turn to equity borrowing during periods when they are facing ?nancial dif?culty
rather than exuberant consumption on the back of raising house prices (Smith et al.,
2009; Parkinson et al., 2009). Compared to those who deem themselves to be
comfortably off, those who are struggling to manage are signi?cantly more likely to
equity borrow, irrespective of wider economic cycles. Even during periods of economic
prosperity, equity borrowing is preceded by dif?culties in meeting housing payments;
in particular where households have gone into mortgage arrears. Previous
research shows the main reasons for mortgage arrears include loss of earnings
through unemployment and relationship dissolution (Stephens et al., 2008), the same
circumstances associated with equity borrowing (Parkinson et al., 2009). Subsequent to
equity borrowing, households are also more likely to make cut backs in other areas of
spend in order to service additional mortgage debt.
When recession takes hold, however, those who borrowequity are signi?cantly more
likely to have made cut backs in other areas of spend or used a variety of means to
borrow funds in order to meet mortgage payments over the current year (potentially
loans from family or friends, using credit cards (as demonstrated above in the USA) or
other high-interest sources of lending). In these instances, it would appear households
try a variety of means to manage household budgets and equity borrowing is seen
as a resource of last resort (Smith et al., 2007b). The key message from these data is
that whilst the economy is stable or booming, there may be a time to adapt and
plan household budgets prior to equity borrowing. When the economy is in decline the
impact on households is more instant and they have to make quick adjustments to
household spending. This may be less a re?ection of ?nancial incapability (and a need
Figure 5.
Wealth and debt among
owner-occupied
households
M
e
a
n
1995
Equity
borrowers
Equity
savers
Investments Non-housing debt
Equity
borrowers
Equity
savers
2000
2005
£9,000
£8,000
£7,000
£6,000
£5,000
£4,000
£3,000
£2,000
£1,000
£0
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for ?nancial knowledge) and more about households struggling to manage available,
and sometimes rapidly declining, ?nancial resources.
5. Housing wealth: policy implications
The economic crisis of 2007 clearly demonstrates how volatility in housing markets can
translate into macroeconomic instability (Mian and Su?, 2009b). This raises new risks
andpolicyimplications for housing andmortgage markets whichspreadbeyondnational
economic sectors into public welfare initiatives. The evidence presented here (can only)
give an indication of what was happening at the eve of the global recession. They point
towards the strategies that homeowners adopt to manage everydayeconomic turmoil and
the risks they face as other sources of credit are exhausted and the housing equity safety
net is called in. However, equity as a ?nancial resources is getting squeezed, not only as
home prices fall, but constraints within the ?nancial sector are making remortgaging or
re?nancing more dif?cult. But as the data indicate households’ welfare needs do not
dissipate when housing bubbles burst and homeowners with little alternative are
increasingly relying on their housing wealth as a means of welfare provision.
The link between homeownershipeconomies andresidualized welfare states has long
been recognised (Lowe et al., 2008); the assumption being that housing paid for across
the life course is traded-off against future pension provision (Kemeny, 1981; Castles,
1998). The key change in recent years, however, is the restructuring of mortgage
markets and increasing shift towards home-based equity borrowing. The “really really
big trade-off” then comes:
[. . .] between investing in a wide range of collectively sanctioned welfare transfers and
relying on housing wealth (and on the continuing supply of mortgage debt [. . .]) to provide for
individual needs [. . .] (Lowe et al., 2008, p. 9).
Where homeowners are relying on equity borrowing throughout the life course, and
where national efforts are concentrating household resources into their home through
(property) asset-based initiatives, this concentrates too much of the nation’s and
households’ welfare resources into one potentially volatile source; housing. If nations are
to pursue property-based welfare (and the evidence would suggest they are) there not
only needs to be greater accountability and responsibility for credit supply, but also a
need to decouple housing fromglobal ?nancial markets, and a diversifying or sharing of
the risks that homeowners now face.
One such means is the trade of ?nancial instruments based on a Home Price Index
rather than bricks and mortar (Case et al., 1993). Housing derivatives could provide the
vehicle which separates the speculators from those seeking shelter and potentially
provide the means to stabilise home prices (Shiller, 2008). An index may also provide the
basis for new insurance products protecting livelihoods or home equity (Shiller, 2008).
Another means of insuring against or sharing-risk is through shared-ownership
schemes. The idea of shared-ownership is not new (Whitehead and Yates, 2010),
however, it has tended to be used as a vehicle for entry into owner occupation, less so as a
means of managing risk when established homeowners are exposed to failing housing
markets.
Whilst such initiatives may in theory seem a sensible option, in practice people have
been less willing to engage. Previous attempts to establish housing derivatives have not
been sustained (Blank et al., 2010), while the risks exposed in the housing ?nance crisis
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of 2007 may undermine con?dence in such a market for some time. Shared ownership
schemes (for entry into home ownership) too are not without problems (McKee, 2010;
Whitehead and Yates, 2010) and may need considerably more ?exible options if they are
to appeal to existing struggling homeowners, whilst the take-up of private insurance to
protect mortgage payments in the UK, have been somewhat limited and declined in
recent years (Stephens et al., 2008).
This is not to say such initiatives should not be pursued, but in order to make
economic policy more effective, it must take account of the disparity between theory and
practice. Future policy initiatives may bene?t through being informed by more focussed
survey data and qualitative insights into individuals’ beliefs and behaviours towards
home ownership, equity borrowing and budget management.
6. Conclusion
The role of housing wealth has undergone signi?cant change in recent years. Economic
policy response to recession can no longer be considered in isolation of the welfare
provision that residential property provides. The dif?cult dilemma is the inextricable
link between ?nancial policy for promoting economic growth on the one hand, and the
affordability and sustainability of property-based welfare on the other.
The underlying assumptions of asset-based welfare are that home prices continue to
raise and that owners are able to easily liquidate assets in times of need. However, this
rather narrowviewdoes not account for ?uctuations in housing markets, the tightening
of mortgage ?nance, nor indeed the fact that through raising home prices younger
generations cannot get into this asset/welfare market, raising questions of the
sustainability of this kind of welfare cover.
There is a need for further research at the micro-level – both quantitative and
qualitative – to understand the implications of the downturn at the end of the ?rst decade
of the twenty-?rst century. Which as the evidence is showing will not only have
consequences for household?nancial resources andaccess tothem, but that the con?dence
in the housing market and the (falling) ?nancial well-being of individuals means this
recession may have a much longer lasting effect than previously experienced.
Notes
1. Smith and Searle (2008) argue that national accounts over estimate the amount of equity, that
is reinvested back into residential property by including transaction costs in calculations.
Their qualitative analysis also suggests that housing repair often includes the purchase of
goods that provide the ?nishing touches rather than improving the structure of the property.
2. Identi?ed in the BHPS as the person legally or ?nancially responsible for accommodation, or
the elder of two people equally responsible (Taylor et al., 2009, pp. A2-A4).
3. An unbalanced panel is one in which not all individuals may be observed in all years of data.
In this analysis, this may be due to, for example, moving out of, or into, home ownership
during the period observed, or not have mortgage debt recorded in two consecutive years.
4. Equity borrowers and equity savers are terms created by Parkinson et al. (2009).
Withdrawing equity through increasing mortgage debt may be considered a means of
“equity saving” where funds are reinvested back into the home thus increasing the value of
the property, however, this process is still driven by a motivation for borrowing from
existing equity initially and there is no guarantee that prices will raise in line with the
amount reinvested.
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Searle, B.A. and Smith, S.J. (2010), “Housing wealth as insurance: insights from the UK”,
in Smith, S.J. and Searle, B.A. (Eds), The Blackwell Companion to the Economics of
Housing: The Housing Wealth of Nations, Wiley, Chichester, pp. 339-60.
About the author
Beverley Searle is a Human Geographer with a social policy background. She has a BA in Social
Policy from York and was awarded her PhD in 2004 by York University. Her research interests
focus on aspects of home ownership and housing wealth that impact on social welfare and
well-being, more recently, this includes the challenges facing owner-occupier households set
within the context of ?uctuations in the housing market and wider economy. She has published
widely on these issues including her book on well-being and an edited collection (with Professor
Susan Smith) on the Housing Wealth of Nations. Beverley Searle can be contacted at:
[email protected]
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doc_605935451.pdf
The purpose of this paper is to explore the changing role of housingwealth froman investment
vehicle to a welfare resource. It also considers the implications of economic prosperity and decline in theUK
on homeowners, intentions of equity withdrawal, and the consequences of managing household budgets.
Journal of Financial Economic Policy
Recession and housing wealth
Beverley Searle
Article information:
To cite this document:
Beverley Searle, (2011),"Recession and housing wealth", J ournal of Financial Economic Policy, Vol. 3 Iss 1
pp. 33 - 48
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Craig A. Depken, Harris Hollans, Steve Swidler, (2011),"Flips, flops and foreclosures: anatomy
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Recession and housing wealth
Beverley Searle
Centre for Housing Research, The Observatory, Buchanan Gardens,
The University of St Andrews, St Andrews, UK
Abstract
Purpose – The purpose of this paper istoexplore the changingrole of housingwealthfromaninvestment
vehicle to a welfare resource. It also considers the implications of economic prosperityanddecline inthe UK
on homeowners, intentions of equity withdrawal, and the consequences of managing household budgets.
Design/methodology/approach – The paper takes the form of a quantitative longitudinal analysis
of national data and panel survey, including random effects logistic regression model.
Findings – Housing wealth is increasingly being used as a ?nancial safety net across the life course.
Homeowners are equally likely to have engaged in equity-borrowing episodes during periods of economic
prosperity as they are during periods of decline; particularly, lone parents with non-dependent children and
unemployedpeople. Housingtendsto be usedas alast resort once other forms of credit have beenexhausted.
Research limitations/implications – There are data constraints; equity withdrawal can only be
calculated from 1994 and the latest wave of data available is 2008. The research is not therefore able to
consider the full extent of the consequences of the current recession, however, it does provide an
indication of the problems that may emerge.
Social implications – Social implications arise from the concentration of resources into housing
wealth; homeowners may suffer through having increased debt and there are implications for ?nancial
and sustainable welfare policy where home ownership is positioned as a nation’s welfare resource.
Originality/value – The paper draws upon the author’s recent work (in collaboration with others)
which offers insights into the motivations for equity borrowing. This paper offers an original
contribution through presenting empirical evidence on the effect of economic prosperity and economic
decline on householdbehaviour, andadds newinsights in respect of the implications for households who
rely on housing wealth in the context of the current recession.
Keywords Housing, Wealth and income, Recession, United Kingdom
Paper type Research paper
1. Introduction
The booms and busts of economic cycles have implications not only for the events or
shocks that households encounter, but also for the means available to manage
household budgets in the aftermath. In recent years, the role of housing wealth has
become increasingly prominent, particularly, in the wake of the 2007 ?nancial crises
which had the housing market at the epicentre (Vaitilingam, 2009). Whilst the focus of
this attention has been on the marketing and speculation associated with housing
?nancial products, another, often overlooked, element is a signi?cant change in howwe
view and use the wealth (or equity) stored in our homes.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
The BHPS is made available through the Economic and Social Research Council (ESRC) Data
Archive. The data were originally collected by the ESRC Research Centre on Micro-Social
Change at the University of Essex. The ?ndings and views reported in this paper are those of the
authors and should not be attributed to the University of Essex.
The author is grateful to Daisy McGregor at the Reserve Bank of Australia for providing
?gures on Housing Equity Injection in Australia. The author is also grateful for the insightful
comments from an anonymous referee, and for the support and guidance from Steve Swidler.
Recession
and housing
wealth
33
Journal of Financial Economic Policy
Vol. 3 No. 1, 2011
pp. 33-48
qEmerald Group Publishing Limited
1757-6385
DOI 10.1108/17576381111116867
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For many years, owner-occupiers (and their offspring) envisaged the family home as
an investment vehicle, gradually paid off over the life course to provide a nest egg for
retirement and inheritance for the next generation. This traditional view of housing
wealthis, however, changing. The deregulationof the ?nancial sector across manyOECD
nations during the 1980-1990s opened up opportunities for new mortgage markets and
products. These newproducts provideda range of ?exible features enablinghomeowners
to not only overpay their mortgage to clear loans sooner, but also to access their housing
wealth through increasing their mortgage debt (up to an agreed limit) without the
expense or administrative burden of remortgaging or moving home (Smith et al., 2002,
2007a; Smith and Searle, 2008). Whilst a growing proportion of homeowners is taking
advantage of suchproducts little is known about the motivation for increasing household
debt in this way; nor the consequences for managing household budgets.
This paper aims to address some of these issues, building on a line of argument
developed in previous work (Searle et al., 2009b; Smith et al., 2007a), it looks at the
changing ?nancial and welfare role of housing wealth. First, it will discuss the changing
global economic climate and the implications for households’ wealth accumulation and
?nancial management; second, it considers the micro-economic consequences of
economic recession on household’s management of housing debt; policy implications are
then discussed and conclusions drawn in the ?nal section.
2. Housing wealth in a changing climate
Whilst an“of?cial” de?nition of recessionis open to debate, there is a general recognition
that it depicts a period of decline in economic activity (Claessens and Kose, 2009;
Vaitilingam, 2009) in one or more sectors of the economy (Learner, 2008). Using a widely
accepted de?nition of two quarters of negative growth since 2007, there has been a
signi?cant decline in economic activity on a global scale with GDP falling 23.5 per cent
across OECD countries in 2009 (Figure 1).
Figure 1.
Real GDP; percentage
change from previous year
Total OECD
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
The Netherlands
New zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
15.0
10.0
5.0
Source: OECD Economic Outlook 86 Database, Annex Table 1
%
c
h
a
n
g
e
i
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G
D
P
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
–5.0
–10.0
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According to the IMF de?nition – ten or more of the 21 advanced economies being in
recessionat the same time – inthe past 50 years, there have beenfour highlysynchronised
(global) recessions: 1975, 1980, 1992, and 2008 (IMF, 2009). A key difference with the
current, compared to previous, global recession, however, is the role of housing; in
particular the changing nature of mortgage markets and homeowner’s willingness to dip
into their housing wealth. As Figure 2 (the USA), Figure 3 (the UK), and Figure 4
(Australia) show, there are clear links between national GDP, home prices and cash-out
re?nancing (or equity borrowing).
Figure 2.
Home Price Index, GDP
and cash-out re?nancing
USA (1993-2009)
100.0
8.5
GDP quarterly %
change based on
chained 2005 dollars
(right axis)
Source: Bureau of Economic Analysis, National Economic Accounts, Freddie Mac, Conforming Loans,
S&P Case-Shiller Index
Total home equity
cashed out ($bn) (left
axis)
S&P/Case-Shiller home
price index (Jan
2000=100) (right axis)
6.5
4.5
2.5
0.5
%
c
h
a
n
g
e
–1.5
–3.5
–5.5
–7.5
80.0
60.0
40.0
20.0
0.0
$
(
b
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)
–20.0
–40.0
–60.0
1
9
9
3
1
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2
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2
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–80.0
Figure 3.
Home price change and
mortgage equity
withdrawal UK
(1990-2009)
1
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£
(
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5.0
4.0
3.0
2.0
1.0
0.0
–1.0
–2.0
–3.0
GDP qrt% change
based on chained
2005 pounds (right
axis)
Source: Bank of England, Halifax House Price Index, ONS
Housing equity
withdrawal, (£bn)
(left axis)
Halifax house price
index qrt% change
(Jan 2000=100)
(right axis)
%
c
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Recession
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35
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Following the previous global recession in 1992, home prices were slow to recover with
negative growth in Q1-Q2 1995 in the USA and Q2 1994 to Q3 1995 in the UK; equity
borrowing was also in its infancy during this period. More important, however, is what
happened during the prosperous economic climate which followed. At their peak
house prices were raising at 4-6 per cent a quarter in the USA and the UK and
average quarterly withdrawals of home equity reached $80bn throughout 2006
(£14bn throughout 2003). Although the data for Australia re?ect net volume of equity
withdrawal/injection, there is still a clear indication that overall during the boom of
the 2000s Australian’s were withdrawing equity (peaking at $A9.1bn in Q3 2003).
Homeowners had therefore come to rely on a signi?cant ?nancial resource prior to the
downturn.
This rapid increase in household leverage in the USAbetween 2002 and 2006 among
existing homeowners – who took advantage of low interest rates and raising prices to
extract equity – according to Mian and Su? (2009b) was the primary cause of the
2007 global recession. Overstretched households struggling to maintain their housing
payments led to raising household default rates and declining home prices as early as Q2
2006 (20.2 per cent). The response from the credit and ?nancial markets resulted in a
long cycle of household de-leveraging, with the subsequent impact on the real economy
emerging nearly two years later when GDP growth turned negative during 2008.
This presents a worrying picture; recessions rooted in ?nancial market problems –
the acceleration of both credit and debt – are often more costly than others, and may be
particularly detrimental where these coincide with globally synchronized recessions
which tend to be deeper and longer (Claessens and Kose, 2009). The impact that cycles
Figure 4.
Home price change and
housing equity
withdrawal Aus
(1990-2009)
1
9
9
0
1
9
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1
1
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1
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–10
–15
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4.0
2.0
%
c
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a
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0.0
–2.0
–4.0
GDP qrt% change
based on chained
$Aus 2007/8 (right
axis)
Housing equity
withdrawal ($Aus
bn) (left axis)
Note: Housing equity injection is calculated at the macro-level using data from ABS, RBA and
Australian Property Monitors: the values have been reversed so that a negative value indicates an
overall injection of equity and a positive value indicates an overall withdrawal of equity
Source: Reserve Bank of Australia (RBA), Statistical Table G10, Australian Bureau of Statistics
(ABS), Table 6416.0, and see note 1
House price index
qrt% change (Av 8
capital cities) (right
axis)
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in housing markets have on household borrowing behaviour and the subsequent and
detrimental impact this had onthe real economyin2008, demonstrates howessential it is
for economists to gain a better understanding of the motivations of homeowners to
engage in the potentially volatile risk of increasing household debt.
3. Mortgage equity withdrawal – setting the scene
Traditional broadcategories of national surveys have historicallymade it dif?cult tomake
international comparisons on home equity withdrawal, however, new research is
beginning to address this shortcoming, through exploring the circumstances of those who
dip into their housing wealth. A limited but growing body of evidence from the USA,
the UK and Australia (among others) suggests that housing wealth – or more precisely
equity borrowing – is increasingly featuring in homeowners ?nancial planning. This
initially came to light in research fromthe UK(Smith et al., 2007a) which drewattention to
the welfare role of housing wealth; many homeowners recalled experiences where housing
wealth provided a buffer through periods of ?nancial dif?culty (unemployment,
relationship dissolution) or to meet unexpected costs (including health care).
These qualitative insights have been supported by quantitative analysis which show
the proportion of homeowners equity borrowing is increasing and the amounts of equity
being released are substantial (Smith and Searle, 2008); on average £7,500 ($26,000)
released annually in the UK (Australia) between 2001 and 2005 (Parkinson et al., 2009),
with around 25-30 cents on each additional dollar of home equity being borrowed between
2002 and 2006 in the USA (Mian and Su?, 2009a).
While research in the UK (Attanasio et al., 2005) and the USA (Case et al., 2005) has
shown that raising home prices are associated with raising consumption – what is
known as wealth effects – what these studies do not show, and indeed what is dif?cult to
recover fromnational datasets – is exactlywhat goods and services are beingconsumed.
In the USA, for example, analysis points towards “real outlays”, i.e. consumption or
home improvements (Mian and Su?, 2009a), or to cover rapidly growing tuition fees
(Masnick et al., 2006) although precise details are lacking. In the UK, there is a notable
decline in funds being channelled into home extensions and repairs with a corresponding
raise in “other” (non-recoverable) items (Smith and Searle, 2008)[1]. As noted above,
initial qualitative insights into what this “other” may include point towards a welfare
provision (Smith et al., 2007a) or “care-full” (Searle et al., 2009a, p. 13) consumption as
owners use their equity to support family members. Quantitative studies in the UK
(Benito, 2007; Parkinson et al., 2009) and the USA (Hurst and Stafford, 2004) are also
showing that home equity may be performing the role of a ?nancial buffer. In summary,
what this research shows is that the storing and consumption of housing wealth is no
longer in line with the long-standing and popular “life cycle” approach (Ando and
Modigliani, 1963) but is more akin to a “precautionary savings” (Skinner, 1996) or
“wealth-fare” insurance model (Parkinson et al., 2009; Wood et al., n.d.); homeowners are
more able and willing, and indeed may need to use their housing wealth to smooth out
disruptions to the household balance sheet at any point across the life course.
Much of this research, however, was conducted through a period of economic
prosperity, given that housing wealth is a ?nancial buffer during the economic highs –
that even in prosperous times homeowners struggle to cope with shocks to the
household purse – this begs the question what is the role of housing wealth, and equity
borrowing, during economic lows? The rest of this paper will compare household
Recession
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37
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behaviour during this prosperous period with the last two recessions in the UK; the early
1990s when equity withdrawal was to some extent still in its infancy, and the late 2000s
when equity withdrawal had become a more routine activity among homebuyers. The
analysis builds on the work reported above, and in particular draws upon the
methodology developed by Parkinson et al. (2009) and Searle et al. (2009a).
4. Mortgage equity withdrawal through booms and busts
The data for the analysis are drawn from the British Household Panel Survey
(BHPS); a nationally representative sample of around 5,500 British households when it
commenced in 1991. Increased household samples for Scotland and Wales (1999) and an
additional sample from Northern Ireland (2001) extended coverage to the whole of
the UK, and raised the sample size to around 10,500 households (20,000 individuals).
Individuals are reinterviewed each year, members of original households who move are
followed, and people who join existing households, or who reach the age of 16, are added
to the sample.
Using this data presents two key limitations. First, changes in mortgage debt can
only be calculated from 1994, however, as discussed below the social and economic
consequences of the 1990-1992 recession were still being borne out. Second, data are
currently only available for 2008. However, pooling the data fromthe end of the boomto
the start of the bust is possible, and by comparing the two periods it may be possible to
speculate on the potential impact and implications for households’ ?nancial welfare as
they manage micro-economic shocks in the context of macro-economic ?uctuations.
In this analysis, the sample frame is based on homeowners who are the reference
person[2] and their partners where appropriate. There are several channels through
which equity may be accessed including downsizing or selling up, however, as the focus
of this analysis is on mortgage equity withdrawal, two further selection criteria are used:
homeowners who were resident at the same address in two consecutive waves, and for
whom mortgage debt (including no debt) is recorded. This enables the calculation of
changes in mortgage debt which have not been driven by a property transaction, but
have been instigated by some other need. Using these criteria produces a sample of
13,599 homeowners (contained in 8,890 households). These data have been pooled to
create an unbalanced[3] person period dataset, where each calendar year is treated as a
single episode during which a homeowner has the option to withdrawequity. The unit of
analysis here is an episode (calendar year) and not individual homeowner, giving a
sample size of 84,917 individual episodes (51,658 household episode).
Changes in mortgage debt are calculated by subtracting the previous year’s total
outstanding mortgage from the current year. This gives raise to three sub-groups:
mortgage debt stays the same, decreases, or increases. The ?rst two are identi?ed as
people who have not withdrawn equity (equity savers); the third group is those who
have withdrawn equity (equity borrowers)[4]. The following analysis compares
the circumstances of equity savers and equity borrowers and considers the
consequences of sustaining increased housing debt.
First, looking across the period from 1994 to 2008, Table I shows among the total
sample of owner-occupiers (n ¼ 13,599) whilst only 47.2 per cent have not withdrawn
equity at any point (equity savers), over half (52.8 per cent) of the sample have
withdrawn equity in one or more years surveyed (equity borrowers). Among those who
equity borrow 42 per cent (n ¼ 3,034) are one-off events, the remaining 58 per cent
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(n ¼ 4,144) are serial borrowers the majority of whomhave withdrawn equity on two or
three occasions (n ¼ 2,902), with up to 90 homeowners withdrawing equity at least
seven times between 1994 and 2008.
Table II shows the propensity for equity borrowing during periods of economic
growth and decline. The UK has experienced two economic recessions during the last
decade; 1990-1992 and 2008-2009. However, it is acknowledged that the social costs of
economic downturns extend far beyond “of?cial” periods based on negative (GDP)
growth. As discussed above home prices were still falling after the 1992 global recession
in the USA and the UK. Unemployment rates also lagged recovery in the economy not
returning to their pre- Q1 1990 recession level until Q3 1996 (5.3 per cent) in the USAand
Q3 1997 (6.8 per cent) in the UK. Taking these factors into account and given the
limitations of data available, the pooled data have been combined into two periods:
economic prosperity (1998-2006; n ¼ 56,165) and economic decline (1994-1997 and
2007-2008; n ¼ 28,752). The data indicate that homeowners are equally likely to have
engaged in equity borrowing episodes during periods of economic prosperity
(19 per cent) as they are during periods of decline (18 per cent), suggesting there are
some circumstances which put suf?cient demands on household ?nances and the need
to withdraw equity irrespective of wider economic conditions.
These circumstances are analysed using a random effects logistic regression model.
The model does not speci?cally aimto identify those circumstances which may increase
or detract from people’s likelihood of withdrawing equity, this is being developed in
detail elsewhere (Wood et al., n.d.), however, it does draw upon this work to control for
factors which are linked with the propensity for equity borrowing, with the aim of
identifying the behaviour of those who are most likely to borrow from their housing
equity during periods of economic prosperity and decline. The reference categories are
therefore those groups which are among those least likely to withdraw equity (this is
con?rmed through a series of regression models, results not shown); single person
households, individuals who are single and have never been married, and those who are
not in the labour force (NILF) (e.g. retired, family care, long-term sick). The results are
shown in Table III.
Model 1 controls for household type and relationship status, it shows,
as demonstrated elsewhere (Parkinson et al., 2009), how the demands of a growing
family impact on equity borrowing. During periods of “economic prosperity”,
Prosperity Decline
n % n %
Equity saving 45,418 81 23,589 82
Equity borrowing 10,747 19 5,163 18
Total 56,165 100 28,752 100
Table II.
Equity borrowing and
economic cycles
(1994-2008)
n %
Equity savers 6,421 47.2
Equity borrowers 7,178 52.8
Total 13,599 100.0
Table I.
Proportion of equity
borrowers and equity
savers 1994-2008
Recession
and housing
wealth
39
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
4
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
E
c
o
n
o
m
i
c
p
r
o
s
p
e
r
i
t
y
(
n
¼
4
2
,
8
1
6
;
g
r
o
u
p
s
¼
9
,
7
2
2
)
E
c
o
n
o
m
i
c
d
e
c
l
i
n
e
(
n
¼
1
4
,
7
1
1
;
g
r
o
u
p
s
¼
7
,
5
3
7
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
H
o
u
s
e
h
o
l
d
a
n
d
r
e
l
a
t
i
o
n
s
h
i
p
C
o
u
p
l
e
1
.
2
3
(
0
.
2
1
)
1
.
2
7
(
0
.
2
2
)
1
.
3
4
(
0
.
2
3
)
0
.
3
3
(
0
.
0
8
)
*
*
*
0
.
3
3
(
0
.
0
7
)
*
*
*
0
.
3
3
(
0
.
0
8
)
*
*
*
1
.
8
7
(
0
.
3
3
)
*
*
*
2
.
0
9
(
0
.
3
6
)
*
*
*
2
.
1
3
(
0
.
3
7
)
*
*
*
0
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4
8
(
0
.
1
0
)
*
*
0
.
5
2
(
0
.
1
1
)
*
*
0
.
5
2
(
0
.
1
1
)
*
*
C
o
u
p
l
e
þ
n
o
n
-
d
e
p
c
h
i
l
d
1
.
8
1
(
0
.
3
2
)
*
*
1
.
7
2
(
0
.
3
1
)
*
*
1
.
7
8
(
0
.
3
1
)
*
*
0
.
5
0
(
0
.
1
1
)
*
*
0
.
4
6
(
0
.
1
0
)
*
*
0
.
4
6
(
0
.
1
0
)
*
*
L
o
n
e
p
a
r
e
n
t
1
.
4
9
(
0
.
1
6
)
*
*
*
1
.
7
5
(
0
.
0
2
)
*
*
*
1
.
6
7
(
0
.
1
8
)
*
*
*
1
.
0
1
(
0
.
1
8
)
1
.
2
3
(
0
.
2
2
)
1
.
1
2
(
0
.
2
0
)
L
o
n
e
p
a
r
e
n
t
þ
n
o
n
-
d
e
p
c
h
i
l
d
1
.
6
4
(
0
.
2
2
)
*
*
*
1
.
5
5
(
0
.
2
0
)
*
*
*
1
.
5
2
(
0
.
2
0
)
*
*
1
.
6
4
(
0
.
3
3
)
*
1
.
5
1
(
0
.
3
0
)
*
1
.
4
3
(
0
.
2
9
)
S
i
n
g
l
e
p
e
r
s
o
n
(
r
e
f
.
)
C
o
n
t
i
n
u
o
u
s
r
e
l
a
t
i
o
n
s
h
i
p
1
.
0
5
(
0
.
2
0
)
1
.
0
4
(
0
.
1
9
)
0
.
9
9
(
0
.
1
9
)
3
.
8
2
(
0
.
9
4
)
*
*
*
3
.
8
1
(
0
.
9
4
)
*
*
*
3
.
8
2
(
0
.
9
5
)
*
*
*
I
n
a
r
e
l
a
t
i
o
n
s
h
i
p
1
.
0
4
(
0
.
2
1
)
1
.
0
6
(
0
.
2
1
)
0
.
9
9
(
0
.
2
0
)
3
.
6
0
(
0
.
9
4
)
*
*
*
3
.
8
9
(
1
.
0
1
)
*
*
*
3
.
7
1
(
0
.
9
7
)
*
*
*
R
e
p
a
r
t
n
e
r
e
d
1
.
5
0
(
0
.
3
0
)
*
1
.
3
3
(
0
.
2
6
)
1
.
2
7
(
0
.
2
5
)
4
.
5
6
(
1
.
1
8
)
*
*
*
4
.
1
4
(
.
0
8
)
*
*
*
4
.
0
3
(
1
.
0
5
)
*
*
*
S
e
p
a
r
a
t
e
d
1
.
6
7
(
0
.
2
2
)
*
*
*
1
.
5
3
(
0
.
1
9
)
*
*
1
.
4
6
(
0
.
1
8
)
*
*
1
.
7
7
(
0
.
3
8
)
*
*
1
.
6
5
(
0
.
3
5
)
*
1
.
5
7
(
0
.
3
4
)
*
D
i
v
o
r
c
e
d
1
.
6
3
(
0
.
1
9
)
*
*
*
1
.
4
5
(
0
.
1
6
)
*
*
1
.
4
0
(
0
.
1
5
)
*
*
1
.
8
3
(
0
.
3
2
)
*
*
1
.
7
3
(
0
.
3
0
)
*
*
1
.
6
6
(
0
.
2
9
)
*
*
W
i
d
o
w
e
d
0
.
4
7
(
0
.
0
7
)
*
*
*
0
.
5
1
(
0
.
0
8
)
*
*
*
0
.
5
2
(
0
.
0
8
)
*
*
*
0
.
4
8
(
0
.
1
2
)
*
*
0
.
5
2
(
0
.
1
3
)
*
*
0
.
5
5
(
0
.
1
3
)
*
N
e
v
e
r
m
a
r
r
i
e
d
(
r
e
f
.
)
E
m
p
l
o
y
m
e
n
t
a
n
d
w
e
a
l
t
h
C
o
n
t
i
n
u
o
u
s
l
y
e
m
p
l
o
y
e
d
1
.
8
1
(
0
.
0
9
)
*
*
*
1
.
8
5
(
0
.
0
9
)
*
*
*
1
.
4
9
(
0
.
1
1
)
*
*
*
1
.
5
2
(
0
.
1
2
)
*
*
*
E
m
p
l
o
y
e
d
1
.
5
4
(
0
.
0
9
)
*
*
*
1
.
5
6
(
0
.
0
9
)
*
*
*
1
.
4
4
(
0
.
1
2
)
*
*
*
1
.
4
6
(
0
.
1
2
)
*
*
*
R
e
e
m
p
l
o
y
e
d
1
.
5
0
(
0
.
0
9
)
*
*
*
1
.
5
1
(
0
.
0
9
)
*
*
*
1
.
3
4
(
0
.
1
3
)
*
*
1
.
3
5
(
0
.
1
3
)
*
*
U
n
e
m
p
l
o
y
e
d
1
.
6
4
(
0
.
2
2
)
*
*
*
1
.
5
1
(
0
.
2
0
)
*
*
1
.
6
0
(
0
.
3
0
)
*
1
.
4
6
(
0
.
2
8
)
*
N
I
L
F
(
r
e
f
.
)
R
e
c
e
i
v
e
s
i
n
c
o
m
e
f
r
o
m
r
e
n
t
a
l
p
r
o
p
e
r
t
y
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
E
q
u
i
v
a
l
i
s
e
d
g
r
o
s
s
h
o
u
s
e
h
o
l
d
i
n
c
o
m
e
/
£
1
,
0
0
0
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
L
a
g
g
e
d
h
o
u
s
i
n
g
e
q
u
i
t
y
/
£
1
0
,
0
0
0
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
1
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
1
.
0
0
(
0
.
0
0
)
M
o
n
t
h
l
y
s
a
v
i
n
g
s
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
1
.
0
0
(
0
.
0
0
)
*
*
*
(
c
o
n
t
i
n
u
e
d
)
Table III.
Equity borrowing during
economic prosperity
and decline
JFEP
3,1
40
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
4
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
E
c
o
n
o
m
i
c
p
r
o
s
p
e
r
i
t
y
(
n
¼
4
2
,
8
1
6
;
g
r
o
u
p
s
¼
9
,
7
2
2
)
E
c
o
n
o
m
i
c
d
e
c
l
i
n
e
(
n
¼
1
4
,
7
1
1
;
g
r
o
u
p
s
¼
7
,
5
3
7
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
M
o
d
e
l
1
(
O
R
(
s
e
)
)
M
o
d
e
l
2
(
O
R
(
s
e
)
)
M
o
d
e
l
3
(
O
R
(
s
e
)
)
F
i
n
a
n
c
i
a
l
c
i
r
c
u
m
s
t
a
n
c
e
s
C
o
m
f
o
r
t
a
b
l
e
(
r
e
f
)
G
e
t
t
i
n
g
b
y
/
h
a
v
i
n
g
d
i
f
?
c
u
l
t
y
1
.
2
0
(
0
.
0
4
)
*
*
*
1
.
2
1
(
0
.
0
7
)
*
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
(
t
2
1
)
1
.
0
8
(
0
.
1
8
)
1
.
5
9
(
0
.
3
9
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
(
t
2
1
)
1
.
0
2
(
0
.
1
0
)
1
.
1
0
(
0
.
1
5
)
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
(
t
2
1
)
1
.
6
4
(
0
.
3
4
)
*
1
.
0
7
(
0
.
2
7
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
1
.
2
0
(
0
.
2
0
)
1
.
7
9
(
0
.
4
7
)
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
1
.
4
0
(
0
.
1
4
)
*
*
1
.
8
3
(
0
.
2
6
)
*
*
*
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
1
.
1
3
(
0
.
2
4
)
1
.
0
2
(
0
.
3
2
)
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
b
o
r
r
o
w
i
n
g
(
t
þ
1
)
0
.
8
1
(
0
.
1
4
)
0
.
1
2
(
0
.
1
3
)
*
*
H
o
u
s
i
n
g
r
e
q
u
a
t
i
o
n
c
u
t
b
a
c
k
s
(
t
þ
1
)
1
.
5
6
(
0
.
1
6
)
*
*
*
1
.
1
0
(
0
.
1
6
)
2
þ
m
o
n
t
h
s
l
a
t
e
w
i
t
h
h
s
g
(
t
þ
1
)
1
.
3
9
(
0
.
3
0
)
1
.
0
6
(
0
.
3
5
)
W
a
l
d
x
2
2
,
7
6
2
.
3
5
*
*
*
3
,
1
9
5
.
0
2
*
*
*
3
,
3
0
4
.
0
2
*
*
*
9
3
3
.
2
4
*
*
*
1
,
0
1
0
.
6
5
*
*
*
1
,
0
5
3
.
1
4
*
*
*
L
i
k
e
l
i
h
o
o
d
r
a
t
i
o
t
e
s
t
o
f
p
¼
0
3
9
6
.
9
0
*
*
*
2
2
9
.
0
2
*
*
*
2
0
7
.
7
4
*
*
*
7
.
0
5
*
*
3
.
3
7
*
2
.
8
6
*
N
o
t
e
s
:
S
i
g
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c
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:
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p
,
0
.
0
5
,
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.
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*
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0
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0
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a
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u
s
t
e
r
m
e
a
n
l
a
g
g
e
d
e
q
u
i
t
y
Table III.
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compared to single person households, households with children have signi?cantly
higher odds of withdrawing equity; being nearly double among couple households with
dependent children (OR ¼ 1.87; p , 0.001) and non-dependent children (OR ¼ 1.81;
p , 0.001); and around 50 per cent more likely among lone parents (OR ¼ 1.49;
p , 0.001 and OR ¼ 1.64; p , 0.001, respectively). During periods of economic decline,
however, the odds of equity borrowing are signi?cantly lower; being half as likely for
couples with dependent and non-dependent children (0.50; p , 0.01). However, among
lone-parent households, the odds of equity borrowing are still higher than single person
households, particularly, among lone parents with non-dependent children – here the
odds are the same as during prosperous times (1.64; p , 0.05). Whilst the needs of
children still place demands on household budgets irrespective of wider economic
cycles, it would appear that some couple households are able to manage demanding
spending needs through other means. Among lone parents, however, there may be some
dif?culty adjusting the household budget once children become independent and
bene?ts and tax credits are withdrawn.
Disruption to relationships also presents a motivation for equity borrowing during
economically prosperous times where compared to those who have never been married
the odds of borrowing increase by 50 per cent or more among those who have
repartnered (1.50; p , 0.05), separated (1.67; p , 0.001), or divorced (1.63; p , 0.001).
What is striking, however, is how the odds increase substantially among all groups
during periods of economic decline, and that the independent in?uence that relationship
dissolution has on equity borrowing remains throughout the models, even once
employment, wealth and debt problems are controlled for. Among those who have
experienced the dissolution of a relationship, this could be an indication of the expense
associated with establishing a new relationship and household; or people releasing
equity in anticipation of legal and other expenses associated with divorce. The
consistently increased odds during periods of economic decline compared to prosperous
economic periods may also be an indication of the increased likelihood of the breakdown
of a relationship during periods of recession (Blekesaune, 2008). Some of this increase,
however, may also be in anticipation of dif?cult times ahead. Those in stable
relationships (including those who have yet to experience a relationship dissolution)
may feel suf?ciently secure to bring forward debt where the risk of repayment is shared
across two incomes, or at least one income until the economy recovers.
Model 2 aims to capture some of this instability of incomes through controlling for
employment status and household wealth. The model shows that wealth resources (from
incomes or the amount of equity in the home) have a relatively small but signi?cant
in?uence on homeowners’ decisions of equity borrowing during periods of economic
prosperity. There is a 1 per cent increase in the odds of equity borrowing for every
additional £10,000 in home equity or £1,000 in household income. This may re?ect the
con?dence of homeowners in sustaining increased debt, or indeed having the additional
resource to call upon, whilst economies are booming. Although the positive effect of
incomes remain when the economy is in decline, the effect of housing equity becomes
negligible and loses signi?cance; it would appear that when recession takes hold the
value of property (which may be declining across the board) becomes less important;
those who need to withdraw equity are driven by pressing needs, irrespective of the
resource stored in their home.
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Employment status, however, has a signi?cant impact on equity borrowing. When
compared to those who are NILF, the likelihood for equity borrowing is signi?cantly
higher – the odds being nearly twice those who are continuously employed throughout
the period observed. This lends further support to the changing role of housing wealth
from a nest egg for retirement towards a wealth-fare or insurance role across the life
course. The model also shows that generally the odds of equity borrowingtendto decline
the further away people become from secure employment and they also decline during
periods of economic recession. This is perhaps to be expected as incomes become less
secure and the ability to service additional mortgage debt declines. The exception,
however, is unemployment, among whom the odds of equity borrowing are not only
higher than those who are employed currently (but will leave the labour market at some
point), but also those who have subsequently become reemployed. Furthermore, during
periods of economic recession, people are still motivated to increase mortgage debt even
in times when their prospects of employment may be declining rather than increasing.
As speculated elsewhere, those who anticipate redundancy or future unemployment
may borrow-up in anticipation of a period of reduced income (Wood et al., n.d.). It may
also be a re?ection of the dif?culty some household’s face in adjusting to a sudden
reduction in income, and the need to call in other available wealth resources.
This evidence suggests that on the one hand, households are able to manage their
?nances through recession by drawing upon other resources (savings or investments) or
despite pressing spending needs are able to manage ?nances through making cuts in
other household budgets. On the other, some households may have no alternative but to
draw down their housing safety net. The ability to manage household ?nances during
economic peaks and troughs may then be a re?ection of households’ overall economic
resources. On average, those who withdraw equity had higher incomes (£22,009) than
those who do not (£18,741) and this holds true irrespective of which period equity is
withdrawn. However, when decisions are taken about equity borrowing, it is likely that
households will consider their wider wealth resources. In the years, data are available on
average those who have diverse portfolios (for example, have other investments) are less
likely to withdrawequity than those who do not have this ?nancial resource (£6,806 and
£3,226, respectively). For those who do not have alternative resources, it may be that
equity borrowing comes at the end of a series of credit options; equity borrowers
reported on average twice as much non-housing debt as equity savers (£2,660 and
£1,223, respectively). The data also point towards a worrying trend of increasing debt
among equity borrowers with average non-housing debt (£3,674) exceeding levels of
investment (£3,459) by 2005 (Figure 5).
This indicates that among this sample of homeowners ?nancial resources are
increasingly likely to be contained in their housing basket, making homeowners more
vulnerable to the vagaries of the housing market (Smith et al., 2009), whilst debt is more
likely to become dispersed. These ?ndings support evidence from the USA which also
demonstrates that despite home-equity-based borrowing being more prominent among
homeowners with high credit card utilization, funds are not used to pay down credit card
debt (Mian and Su?, 2009b). This would imply that equity borrowing is not motivated as
a means of managing household budgets through consolidating debt into one
manageable (mortgage) pot, but because there is no alternative; ?nancial portfolios are
becoming less diverse and other forms of credit have been exhausted.
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Of further concern is that households may have to “rob Peter to pay Paul” in order to
balance the household budget. Model 3 captures this through controlling for
households ?nancial circumstances during the period before equity borrowing has
occurred (t
21
), the year in which households withdrew equity and the year following
the withdrawal of equity (t
þ1
). First, the model lends support to a key ?nding to
emerge from both qualitative and quantitative research in that people are more likely
to turn to equity borrowing during periods when they are facing ?nancial dif?culty
rather than exuberant consumption on the back of raising house prices (Smith et al.,
2009; Parkinson et al., 2009). Compared to those who deem themselves to be
comfortably off, those who are struggling to manage are signi?cantly more likely to
equity borrow, irrespective of wider economic cycles. Even during periods of economic
prosperity, equity borrowing is preceded by dif?culties in meeting housing payments;
in particular where households have gone into mortgage arrears. Previous
research shows the main reasons for mortgage arrears include loss of earnings
through unemployment and relationship dissolution (Stephens et al., 2008), the same
circumstances associated with equity borrowing (Parkinson et al., 2009). Subsequent to
equity borrowing, households are also more likely to make cut backs in other areas of
spend in order to service additional mortgage debt.
When recession takes hold, however, those who borrowequity are signi?cantly more
likely to have made cut backs in other areas of spend or used a variety of means to
borrow funds in order to meet mortgage payments over the current year (potentially
loans from family or friends, using credit cards (as demonstrated above in the USA) or
other high-interest sources of lending). In these instances, it would appear households
try a variety of means to manage household budgets and equity borrowing is seen
as a resource of last resort (Smith et al., 2007b). The key message from these data is
that whilst the economy is stable or booming, there may be a time to adapt and
plan household budgets prior to equity borrowing. When the economy is in decline the
impact on households is more instant and they have to make quick adjustments to
household spending. This may be less a re?ection of ?nancial incapability (and a need
Figure 5.
Wealth and debt among
owner-occupied
households
M
e
a
n
1995
Equity
borrowers
Equity
savers
Investments Non-housing debt
Equity
borrowers
Equity
savers
2000
2005
£9,000
£8,000
£7,000
£6,000
£5,000
£4,000
£3,000
£2,000
£1,000
£0
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for ?nancial knowledge) and more about households struggling to manage available,
and sometimes rapidly declining, ?nancial resources.
5. Housing wealth: policy implications
The economic crisis of 2007 clearly demonstrates how volatility in housing markets can
translate into macroeconomic instability (Mian and Su?, 2009b). This raises new risks
andpolicyimplications for housing andmortgage markets whichspreadbeyondnational
economic sectors into public welfare initiatives. The evidence presented here (can only)
give an indication of what was happening at the eve of the global recession. They point
towards the strategies that homeowners adopt to manage everydayeconomic turmoil and
the risks they face as other sources of credit are exhausted and the housing equity safety
net is called in. However, equity as a ?nancial resources is getting squeezed, not only as
home prices fall, but constraints within the ?nancial sector are making remortgaging or
re?nancing more dif?cult. But as the data indicate households’ welfare needs do not
dissipate when housing bubbles burst and homeowners with little alternative are
increasingly relying on their housing wealth as a means of welfare provision.
The link between homeownershipeconomies andresidualized welfare states has long
been recognised (Lowe et al., 2008); the assumption being that housing paid for across
the life course is traded-off against future pension provision (Kemeny, 1981; Castles,
1998). The key change in recent years, however, is the restructuring of mortgage
markets and increasing shift towards home-based equity borrowing. The “really really
big trade-off” then comes:
[. . .] between investing in a wide range of collectively sanctioned welfare transfers and
relying on housing wealth (and on the continuing supply of mortgage debt [. . .]) to provide for
individual needs [. . .] (Lowe et al., 2008, p. 9).
Where homeowners are relying on equity borrowing throughout the life course, and
where national efforts are concentrating household resources into their home through
(property) asset-based initiatives, this concentrates too much of the nation’s and
households’ welfare resources into one potentially volatile source; housing. If nations are
to pursue property-based welfare (and the evidence would suggest they are) there not
only needs to be greater accountability and responsibility for credit supply, but also a
need to decouple housing fromglobal ?nancial markets, and a diversifying or sharing of
the risks that homeowners now face.
One such means is the trade of ?nancial instruments based on a Home Price Index
rather than bricks and mortar (Case et al., 1993). Housing derivatives could provide the
vehicle which separates the speculators from those seeking shelter and potentially
provide the means to stabilise home prices (Shiller, 2008). An index may also provide the
basis for new insurance products protecting livelihoods or home equity (Shiller, 2008).
Another means of insuring against or sharing-risk is through shared-ownership
schemes. The idea of shared-ownership is not new (Whitehead and Yates, 2010),
however, it has tended to be used as a vehicle for entry into owner occupation, less so as a
means of managing risk when established homeowners are exposed to failing housing
markets.
Whilst such initiatives may in theory seem a sensible option, in practice people have
been less willing to engage. Previous attempts to establish housing derivatives have not
been sustained (Blank et al., 2010), while the risks exposed in the housing ?nance crisis
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of 2007 may undermine con?dence in such a market for some time. Shared ownership
schemes (for entry into home ownership) too are not without problems (McKee, 2010;
Whitehead and Yates, 2010) and may need considerably more ?exible options if they are
to appeal to existing struggling homeowners, whilst the take-up of private insurance to
protect mortgage payments in the UK, have been somewhat limited and declined in
recent years (Stephens et al., 2008).
This is not to say such initiatives should not be pursued, but in order to make
economic policy more effective, it must take account of the disparity between theory and
practice. Future policy initiatives may bene?t through being informed by more focussed
survey data and qualitative insights into individuals’ beliefs and behaviours towards
home ownership, equity borrowing and budget management.
6. Conclusion
The role of housing wealth has undergone signi?cant change in recent years. Economic
policy response to recession can no longer be considered in isolation of the welfare
provision that residential property provides. The dif?cult dilemma is the inextricable
link between ?nancial policy for promoting economic growth on the one hand, and the
affordability and sustainability of property-based welfare on the other.
The underlying assumptions of asset-based welfare are that home prices continue to
raise and that owners are able to easily liquidate assets in times of need. However, this
rather narrowviewdoes not account for ?uctuations in housing markets, the tightening
of mortgage ?nance, nor indeed the fact that through raising home prices younger
generations cannot get into this asset/welfare market, raising questions of the
sustainability of this kind of welfare cover.
There is a need for further research at the micro-level – both quantitative and
qualitative – to understand the implications of the downturn at the end of the ?rst decade
of the twenty-?rst century. Which as the evidence is showing will not only have
consequences for household?nancial resources andaccess tothem, but that the con?dence
in the housing market and the (falling) ?nancial well-being of individuals means this
recession may have a much longer lasting effect than previously experienced.
Notes
1. Smith and Searle (2008) argue that national accounts over estimate the amount of equity, that
is reinvested back into residential property by including transaction costs in calculations.
Their qualitative analysis also suggests that housing repair often includes the purchase of
goods that provide the ?nishing touches rather than improving the structure of the property.
2. Identi?ed in the BHPS as the person legally or ?nancially responsible for accommodation, or
the elder of two people equally responsible (Taylor et al., 2009, pp. A2-A4).
3. An unbalanced panel is one in which not all individuals may be observed in all years of data.
In this analysis, this may be due to, for example, moving out of, or into, home ownership
during the period observed, or not have mortgage debt recorded in two consecutive years.
4. Equity borrowers and equity savers are terms created by Parkinson et al. (2009).
Withdrawing equity through increasing mortgage debt may be considered a means of
“equity saving” where funds are reinvested back into the home thus increasing the value of
the property, however, this process is still driven by a motivation for borrowing from
existing equity initially and there is no guarantee that prices will raise in line with the
amount reinvested.
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Searle, B.A. and Smith, S.J. (2010), “Housing wealth as insurance: insights from the UK”,
in Smith, S.J. and Searle, B.A. (Eds), The Blackwell Companion to the Economics of
Housing: The Housing Wealth of Nations, Wiley, Chichester, pp. 339-60.
About the author
Beverley Searle is a Human Geographer with a social policy background. She has a BA in Social
Policy from York and was awarded her PhD in 2004 by York University. Her research interests
focus on aspects of home ownership and housing wealth that impact on social welfare and
well-being, more recently, this includes the challenges facing owner-occupier households set
within the context of ?uctuations in the housing market and wider economy. She has published
widely on these issues including her book on well-being and an edited collection (with Professor
Susan Smith) on the Housing Wealth of Nations. Beverley Searle can be contacted at:
[email protected]
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2. Johnna Montgomerie, Mirjam Büdenbender. 2015. Round the Houses: Homeownership and Failures of
Asset-Based Welfare in the United Kingdom. New Political Economy 20, 386-405. [CrossRef]
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