Households are saving extra cash

ONE in twenty British households are now in negative equity, following the dramatic slip in the housing market.

The Bank of England’s Quarterly bulletin, published today, reveals the proportion of those in negative equity rose from one per cent in 2007, to five per cent this year.

Though not as severe as the 11 per cent rate in the mid 1990s, the steep increase reflects the rapid slump in house prices over the last two years.

But the Bank says that, despite the rise in unemployment, tightening of credit conditions and erosion of home equity, households are not feeling the pinch too badly because of lower mortgage interest rates and slashed prices on consumer goods.

A survey commissioned by the Bank revealed the new mood of cautiousness in British households.
Over 80 per cent of mortgage holders have at least 25 per cent equity in their homes and, compared to last year, more households said they could keep up with their credit commitments without much difficulty. But the Bank found only 20 per cent of households are using the extra money to spend, while the rest are paying off debt or increasing their savings.

The bulletin also revealed a drop in the number of pay settlements to less than two per cent, with many companies keen to freeze pay or defer negotiations. Just under 35 per cent of employees received a basic pay freeze and only one per cent received a pay cut this year.

Conditions in sterling markets improved over the quarter. Despite some temporary bouts of investor nervousness, asset prices continued their recovery from March lows and financial market activity picked up.