Credit crisis fallout to corset homeowner spending

BASEL Mon Jun 30, 2008 6:56am EDT

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BASEL (Reuters) - U.S. consumer spending is likely to suffer because of growing angst over household debt, rising unemployment and a clampdown on bank lending, a heavyweight financial report has predicted.

While much of Europe looks like escaping such problems, the UK faces similar risks and Spain, Portugal and Holland could also suffer, the Bank for International Settlements (BIS) said in its annual report on Monday.

"(U.S.) household spending now seems likely to weaken in response to high debt and service burdens, falling employment and the general tightening of credit conditions," it said.

A growing trend of negative equity -- where falling house prices leave homeowners with a mortgage bigger than their property's value -- is also expected to corset the borrowing ability of U.S. households.

"Some estimates indicate that the share of U.S. households with negative equity is already larger than the peak seen during the UK housing downturn in the early 1990s," the report warned.

In some parts of the United States, houses have halved in value over the last two years as the property bubble has popped and mortgage defaults surge while builders flood already saturated markets with new properties.

"As housing prices fall and credit conditions tighten, (more) such loans are likely to default because borrowers have few alternative financial resources," BIS said.

The report predicted similar problems in the UK if its housing market takes a nose dive, and warned loan to value ratios in Spain even exceed those in problem areas such as the UK and Canada.

(Reporting by Marc Jones; Editing by Ruth Pitchford)

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