MAY 2004

Rising Home Values and Debt Drive British Boom

According to Alan Cowell’s article in a recent issue of the New York Times, the British economy is currently "one of the fastest-growing in the industrialized world." While the economies of France and Germany appear to be stalled, analysts expect that the British economy will grow by 3 to 3.5 percent this year. This increase is reflected in rising home prices. The average value of a home in Britain soared by 50 percent since early 2002. In turn, rising home prices have encouraged consumers to increase their total debt by borrowing against the higher values of their homes. (In contrast to the U.S., interest payments on home mortgages are not deductible for tax purposes.) The banks are offering home loans with low introductory rates that will soon give way to loans with much higher rates. Since last November, the Bank of England has raised its benchmark-borrowing rate from 3.6 percent to 4.0 percent.