Bad News From The Property Ladder

January 31st, 2008

The wave of house repossessions that has been observed in America over the past months is beginning to make itself felt on this side of the Atlantic.

In 2008 alone, the Royal Institution of Chartered Surveyors (RICS) said 45,000 Briton families would lose their home because of the high cost of paying mortgages. This boils down to 123 homes being repossessed every day.

The RICS estimate tallied with a similar projection by the Council of Mortgage Lenders. Meanwhile, the Financial Services Authority raised the alarm on 840,000 mortgages whose holders are deemed risky.

Acquiring a home in the U.K. was easiest in 1996. If the cost to buy a house now is compared to 12 years ago, the RICS said the bill has gone up by 351 percent. A British couple who jointly earn $52,995 (26,595 pound) a year after taxes, must save 104 percent of their annual take-home pay or $55,253 (27,729 pound) to afford the deposit, fee and duties if they were to purchase a typical house this year.

RICS blamed the spiraling cost of owning a house to the slight reduction in the loan-to-value ratios lenders were willing to extend to first-time buyers, the heavy stamp duty and other costs that go with buying a residence.

Meanwhile, a survey by personal finance website MoneySupermarket.com reflected the general gloomy atmosphere pervading the British home mortgage market. Three percent of the respondents thought they would be declared bankrupt this year, while 6 percent fear their homes will be repossessed in 2008.

Given the survey size, the 3 percent is equivalent to 1.35 million Britons who think they will be declared bankrupt, and the 6 percent represents 2.7 million adults who fear losing their homes. The widespread pessimism, though, is far greater than what RICS and the CML project.

Tim Moss, head of loans at MoneySupermarket, explained, “People don’t know when the credit crunch is going to stop. Many people are starting to feel the pinch, with stock markets falling, their utility bills rising and their disposable income going down, and they may never have experienced that in the past.”

RICS senior economist David Stubbs added first-time homeowners will find it harder this year to acquire their own property, and the signs are that the situation will not improve in the short term.

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Heed Not the Vested Interests, Forge Your Own Path

January 29th, 2008

The state of the markets over the past week are not the harbingers of doom that many people are saying, they are, however, a clear sign of extreme uncertainty, even among professional investors and top economists. The basic indicators are confusing.

The Bank of England, for example, is stumped by the apparent strength of the UK jobs market. A recession should mean a sharp fall in employment, but that has not happened yet. The price of gold shot to a record high on Friday, a normal warning of a serious downturn. Yet the price of base commodities, such as iron ore, is also rocketing, a sign of a thriving world economy.

There are two halves to the answer. First is the nature of the crisis gripping western markets. It is driven by the extreme problems in financial services, where greedy banks have invested heavily in dubious loans and compounded the problem by trading them in arcane derivatives. Not only have banks stopped lending, but nobody knows the full size of the losses.

Britain’s economy is heavily reliant on financial services. If you take the widest measure, some 30% of GDP is generated by this sector. Serious problems on Wall Street and in the City would have a disproportionate effect on the wider economy and further reduce an already falling tax take for the Government. Add our rising budget deficit and a faltering housing market and things are looking shaky. No lifeline from vibrant China or India is likely to be strong enough to pull the economy out from the down draught created by America.

Despite Government statements to the opposite, we are facing a gloomy outlook. The Bank of England may well cut interest rates early next month, but its primary duty is to control inflation. This makes it more inhibited than the Fed in boosting the economy. Mr Brown’s reputation for economic competency is falling rapidly while that of the Tories is rising. Mr Brown will try to blame any setbacks on world events outside his control and appeal to voters as the strong man who can pilot the ship of state through the coming storm.

Yet the excuses will not wash. Rising taxes have hit private incomes. The state is running an enormous budget deficit to pay for the barely adequate services that it renders to the British public. In the boom years Mr Brown built up no reserve to compensate for falling revenues in the bad. He cannot afford to pump the economy full of more public spending as he did in the wake of the dot.com crash.

Of course the effects of the slowdown will not be felt at the top of the economy by the Prime Minister or the Governor of the Bank of England, but at the bottom by the ordinary people. Brown has been boasting that the British economy is best placed to weather the storm while various bankers bemoan a complete economic collapse. Remember, each party has a vested interest in making you believe their version of events. Tread carefully in these turbulent times and always plan for the worst while hoping for the best.

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Campus Unease and Government Greed

January 25th, 2008

Controversy is brewing about Government plans to release information about student loan debt to credit rating agencies at the same time as the interest rate on such loans has doubled.

While students are told that interest rates are kept in line with inflation when taking out loans, many are unaware that the rate is set according to the RPI inflation measure rather than the newer, and lower, official CPI measure.

This has led to the rate on loans doubling for the next year to 4.8%, from 2.4% the previous year, due to a spike in inflation.

Potential first-time buyers already struggling to cope with high house prices and mortgage lenders tightening their criteria have been warned that missed payments being recorded on their credit files could cause problems. While missed payments on student loans will show up as a black mark, positive details on those who have made all their payments on time will not be recorded.

The Government has not yet confirmed when it will begin releasing information about student loan payments to credit agencies, but the information will begin to show up this year.

Protests have been made against the change, with a group set up on networking site Facebook attracting more than 26,000 members. Most complaints have called for student loans to track the official CPI measure rather than RPI.

Higher education minister Bill Rammell was criticised after defending the loan interest stating that repayments would not change as they are collected as a percentage of salary above £15,000. Critics pointed out that this was encouraging poor personal financial management as the repayments may not change but the interest rate charged on the outstanding balance had doubled.

While the Government claims that it is simply trying to create a level playing field for student loans, student groups point out that using the higher calculation of inflation is simply a bare faced money grabbing scam.

The funding of higher education students is an interesting case in the personal loans market. The move from grants to loans was meant to shift the system away from state handouts and towards a more market orientated approach. These latest moves, however, both fail to make the system more equitable and will put students off from higher education. At a time when the Government wants to increase the percentage of students continuing to higher education to 50% this is at best muddled policy making and at worse counter-productive.

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