Is household deleveraging bad for growth?

Whether UK households are over-leveraged or not (see debate here), they’re certainly behaving as if they are.

The latest borrowing figures from the British Bankers Association (BBA) shows that net mortgage lending fell by £73m in May. This means that the British public, in aggregate, paid down existing mortgages over the month, rather than taking on new home borrowing.

Indeed, this is the first time since these records began in September 1997 that net mortgage lending fell in a month.

Does this matter for the wider economy? Interesting the OBR suggested in March (Box 3.3, p58-59), that it does not:

“We do not expect household sector deleveraging to drag significantly on GDP growth, mainly because most consumers do not depend on credit to finance their spending and they have already made much of the required adjustment to their lower expected income. Our expectation that GDP growth will be weaker than previous recoveries is based more on our expectation of weak income growth. If banks shrink their loan portfolios this could lead to a slower recovery in the housing market and weaker residential investment, but this type of expenditure accounts for a relatively small share of GDP.”

That’s a bold assumption given that many economists take into account weath effects when forecasting consumer behaviour. Put bluntly, if people feel that their houses are going up in value they will be more inclined to spend, and vice versa.

And the OBR does predict a recovery in the housing market:

It expects that prices will fall by 0.4 per cent this year, before rising by 0.1 per cent in 2013, 2.5 per cent in 2014. And in 2015 and 2016 it thinks house prices will register annual growth of 4.5 per cent.

No sign of that pick-up, though, in the latest BBA mortgage approval figures:

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• greggf

  So what’s new Ben?
  Japanese households have been doing this for decade or so, and it’s the prime factor in their deflation problem.
  Time you started talking about it, because you can forget all your optimistic forecasts, deflation is here and it will soon be big time.
  I’d give you a link but disqus won’t cooperate….