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from The Great Debate UK:

Britain faces recession without housing ATM

James Saft is a Reuters columnist. The opinions expressed are his own.

Even in the good times, many British consumers were borrowing against their houses just to fund routine consumption, indicating a big hit to come for retail sales and for the banks who hold the loans.

With house prices falling rapidly and mortgage debt tougher to get, it is no surprise that homeowners are less able and inclined to borrow against their houses in order to spend.

That will be hitting the High Street now - analysts are expecting a 0.6 percent fall on the month in retail sales for November when data are released later this week. But a rise in unemployment next year could expose a really serious weakness in household finances, as consumers who counted on being able to extract wealth from their houses to smooth consumption in bad times find that, when bad times come, the wealth isn't there and the banks don't want to lend anyway.

Researchers at Durham University looking at survey data found that 37 percent of homeowners borrowed against their house between 2002 and 2005, typically realising about 6,000 pounds. That's a lot people borrowing a lot of money against very illiquid and now hard to realise assets.

Even more interesting is the pattern of what householders were doing with the money and what was happening to them when they decided to borrow. Over time the proportion of people borrowing to re-invest in their houses through improvements fell, while more was finding its way into day-to-day costs, according to Susan J. Smith, a professor at Durham and one of the authors of the study.

This was borne out by a high percentage of equity borrowers who had lost their jobs, become pregnant or had a child in the year they borrowed.

Consumers go it alone as storm clouds gather

The dust has settled on Alistair Darling’s first Budget and consumers have been given little reason for celebration. The Chancellor, though announcing various measures designed to increase housing affordability, has done nothing to help the masses.

There were no moves to give a helping hand to hard-pressed householders, already struggling amid rocketing mortgage, food, fuel and tax costs, to ride out an impending recession. Darling did pledge to introduce a savings scheme targeted at low and moderate earners, often least able to save: the “saving gateway” will attract government matching for savings over the duration of people’s participation in the scheme. This has the potential to introduce up to eight million people into mainstream savings in the UK who otherwise might not make thrift a priority.

But the level of take-up of such a scheme, amid record personal debt levels and huge pressure on people’s purse-strings, is debatable. Other such government schemes to encourage the nation to save have hardly been a runaway success: think stakeholder pensions and child-trust funds (CTF). One fifth of parents currently let their CTF expire — the government can’t even give money away.

Individual savings accounts (ISAs), on the other hand, have flourished. They are one of the government’s true success stories. More than one in three adults hold an ISA and almost 215 billion pounds has been invested — making them far more popular than other savings initiatives.

Yet, the limits that savers can squirrel away into these tax-efficient vehicles have sorely failed to keep pace with inflation. The allowance will increase to 7,200 pounds from 7,000 pounds (3,600 pounds of which can be held in cash, up from 3,000 pounds) in the coming tax year — but that means the total threshold has risen by less than 3 percent since the accounts were introduced almost a decade ago. “Failing to increase ISA allowances further is a poke in the eye of savers who need encouragement to put away money,” says David Kuo, head of personal finance at Fool.co.uk.

Other changes to the ISA regime mean people will be able to switch cash holdings into stocks and shares — but the reverse will not be possible. And, once the switch has been made, there’s no turning back. The new rules raise the spectre of “another ghastly financial scandal”, according to Cliff Husband, research director at AWD Chase de Vere. “People could switch their ISA cash savings into investments unaware that they can’t switch back. This looks like another poorly delivered initiative from the government; it would be far fairer to all taxpayers if the switch between cash and investment within an ISA could be easily reversed.”

On pensions, too, there is little to encourage saving. While scrapping the 10 pence income tax rate and reducing the basic rate by 2 pence has done next to nothing to increase people’s take home pay, it has reduced the amount of tax relief they’ll get on their pension savings. The Chancellor has maintain higher level tax relief on gifts to charities, so why not for pensions?