A new report issued by the Bank of England has revealed that the amount of equity “unlocked” from property during the second quarter of this year stands at -£2.76 billion - the first negative number measured on the survey since 1998. This indicates that more equity was added to property than withdrawn from it over the three-month period.

The increase of equity is also the largest since the Bank started taking records thirty-eight years ago.

This newly conservative attitude among homeowners may be attributed to the recent downturn in the UK property market. Recently released figures from Nationwide, indicates that house prices have dropped for the past eleven months in a row, and are currently around 12 percent below the height of the market last year.
Lenders have additionally markedly reined in their rules for borrowers applying for loans – including secured loans - due to the crisis, which has deteriorated recently with the nationalisation of Bradford & Bingley and the takeover of HBOS.

Equity release over the first quarter this year stood at £5.24 billion.
The Bank of England’s Credit Condition report shows “expectations for house prices and concerns about the economic outlook” led banks and building societies to reduce the amount of mortgages available. Over the next few months the credit crunch is widely expected to get worse as wholesale funding conditions also tighten and banks lose their appetite for risk. Unsecured credit – the form of personal loans, credit cards and overdrafts – also decreased.

The Bank of England also revealed requests for mortgages and remortgages “declined sharply” over the three months and demand was expected to fall further. The survey of lenders also revealed an increase in default rates on mortgages and loans and higher levels of people struggling to pay their debts is expected as the economy continues to struggle.

In a more upbeat mood, The Bank of England is widely expected to reduce interest rates this Thursday in an attempt to bolster the floundering economy. Financial turmoil, plus last week’s gloomy manufacturing data have increased pressure on the Bank’s Monetary Policy Committee to reduce rates. Economists say a quarter of a percentage point cut is most likely but some think a half-point reduction is possible.

A reduction in the base interest rate would help boost the housing market and consumer spending. The Bank has held off trimming rates until now because of rising inflation. However the balance of opinion has swung in favour of a rate cut following the manufacturing sector’s downbeat figures.

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