BRITONS are cashing in on the rising values of their properties at record rates, leaving the economy increasingly vulnerable to a collapse in house prices.

New Bank of England figures showed that homeowners withdrew a record £12 billion from their properties in the third quarter of last year, a development that could spell trouble for the UK economy when the housing boom ends.

The surge in so-called mortgage equity withdrawal — when a homeowner increases the size of his mortgage and uses the proceeds to finance consumer spending — also presents the Bank’s Monetary Policy Committee (MPC) with a dilemma. A further cut in interest rates by the MPC is likely to result in a fresh rise in mortgage equity withdrawal and, therefore, increase the risks to the economy in the medium term. At the same time there are growing signs, such as yesterday’s record £4 billion trade deficit, that the wider economy is weakening. This is increasing the pressure on the MPC to cut rates and bolster economic growth.

The latest Bank figures showed that homeowners withdrew £11.98 billion from their properties in the third quarter, encouraged by low borrowing costs and sharp gains in house prices. This was nearly double the £6.28 billion recorded in late 1988, the peak of the last housing boom.

Expressed as a share of after-tax income, mortgage equity withdrawal was 6.6 per cent in the quarter, almost a full percentage point above that of the second quarter. As a share of income, mortgage equity withdrawal was last higher in the third quarter of 1988, when it was 8.1 per cent.

The figures exclude those householders who remortgage and use the proceeds to finance home improvements, concentrating instead on the money that is taken out of property altogether.

Mortgage equity withdrawal featured heavily in the 1980s property boom and left millions struggling to cope with their housing debt when prices collapsed 12 years ago.

When a homeowner uses increased mortgage borrowing to finance spending it reduces the gap between the size of his mortgage and the value of his home. This means that if prices fall sharply there is a greater risk of negative equity, when a house is worth less than the mortgage.

Ciaran Barr, of Deutsche Bank, said: “The simple fact that the total amount of borrowing is so high is a major risk. Historically, such a sharp rise in house prices has always been followed by a crash. This time round, it could be different. But you have to be concerned that we will be unable to get through all this unscathed.”

Developments in the housing market limit the Bank’s scope to help weaker parts of the economy by cutting interest rates.

The latest trade figures, with falling exports pushing the UK’s trade deficit to its largest since records began more than 300 years ago, showed that conditions were becoming tougher for many British companies. But interest rates were likely to be on hold until at least the spring, analysts said.

In November the total UK deficit on traded goods was £3.98 billion, almost £1 billion worse than the City’s consensus forecast.

A sharp drop in crude oil exports, in particular to the US, was the main reason for the unexpected rise in the trade gap. But even after stripping out oil and other erratic items, the figures were poor, with exports down £382 million in the month to £12.61 billion.