Mummy and Daddy help out their struggling offspring

February 29th, 2008

In light of the credit crunch and the associated drying up of traditional credit funds a new report that is interesting, timely, and personally relevant has been made available. It states that 55% of parents have given or lent their children or grandchildren an average of £12,000 in the last year.

The YouGov poll of 5,783 adults suggested a 16% increase in the number of parents giving or lending money to their offspring, compared with 39% last year.

More than half (52%) also claimed that they were expecting to have to hand over some more in the future.

More than a third (36%) of those asked said that they had been planning to use the money in retirement, although 63% said they were happy to help out.

‘It seems that although people could well be tightening the purse strings at a time when the credit crunch could affect finances, adult children are still managing to extract what they can from mum and dad,’ said a spokesperson for the polling organisation.

Four in ten (42%) of recipients use the money to pay off debts, compared with 22% last year, the survey says, while one in three used it to get on the property ladder.

The 29% that used it to help buy a house is expected in increase this year following the recent end of 125% mortgage deals and a squeeze on first-time buyers when Nationwide interest rates for borrowers without substantial deposits were raised.

Other typical uses for the loans were to pay for a car, living expenses, education fees or household expenses such as furnishings, the survey said.

There is a slight feeling that this survey is just stating the obvious since most people can figure out that wealthy parents continue to help their children financially far beyond their schooling and university.

The wider effects of this on the economy are varied. Consumer spending will be helped despite the down turn in credit. However, pressure on pension funds, both public and private, will increase since peoples wealth is passing down the family rather than providing for their retirement.

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The far reaching effects of the credit crisis

February 28th, 2008

There are signs that the credit crunch and its various effects on the credit markets could be much more long term than previously thought. Lending models that have financed so much cheap credit are now being entirely re-built as banks reel from the sub prime crisis.

The “originate and distribute” model, under which banks wrote loans but then sold on the assets to other institutions, has fed market worries since the start of the credit crunch, as there is little clarity about where risk lies.

The Financial Services Authority’s chief executive, Hector Sants, told BBC radio, ‘I don’t think markets are ever going to return to the way they were. The idea that at some point they will go back to normal, I think, is a misnomer.’

‘We still believe that (packaging loans and selling them on) will be doable, but probably using simpler and more understandable vehicles which investors who are buying this dispersed risk can have greater confidence in,’ he said.

Sants’ comments revived concerns among some industry watchers that the regulator could take aim at the originate and distribute model — for example, by including off-balance sheet vehicles in capital requirements, a move which would batter already vulnerable financial positions for many lenders. Failing to allow banks to free up capital for more loans, moreover, would have a significant impact on the wider economy.

‘This strategic rebalancing may further affect the availability and price of credit, but from a regulator’s point of view that is not necessarily a bad thing,’ Sants said.

‘Easy credit is not necessarily good for either consumers or the economy in the long term.’

Delivering a swipe just as banks come to publish the bonuses, benefits and salaries received by top executives, Sants also criticised lenders’ remuneration systems, suggesting that the bonus culture may encourage excessive risk taking.

“There is a risk that the remuneration structures are too short-term and that they do incentivise behaviour which is not helpful in terms of maintaining long-term financial stability.”

The biggest British casualty of the credit crunch has been mortgage lender Northern Rock , whose woes shook the banking system last September. The firm suffered a run on deposits, and it was finally nationalised by the government earlier this month.

The FSA is due to present an internal report on the Northern Rock debacle to the FSA board on Thursday, though the full review of its actions during the mortgage bank’s crisis will not be made public until mid-March.

Sants, whose FSA has come under fire for its role in the Northern Rock saga, said the regulator’s supervision of the mortgage lender was ‘not of sufficient intensity and rigour’ and it did not do enough to challenge the board on risk management.

‘We were clear from the outset that the standard of supervision of Northern Rock was not acceptable to us,’ he said. ‘That needs to be addressed.’

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More Mixed Signals from the Markets

February 26th, 2008

Some good news for the housing market emerged yesterday, as the British Bankers’ Association (BBA) reported ‘exceptionally strong’ demand for funds to remortgage property. That would suggest that the credit crunch may not be affecting those refixing their mortgages quite yet, contrary to some of the more gloomy predictions about their plight.

The BBA said the number of remortgage approvals rose to 79,016, up 17 per cent on December and up 39 per cent year-on-year as a raft of borrowers came off two- and three-year fixed rate deals, albeit usually with a ‘payment shock’ as they moved on to the higher rates now generally charged.

The number of mortgages approved, that is entirely new finance flowing into the property market, was also up on December, although that was by a very low figure. Some 44,288 new mortgages were approved by the major banks in January, higher than expected by analysts. A total of £18bn was advanced to consumers during the month, up from £15.5bn in December, although the figure was down 4.7 per cent on a year earlier.

Nonetheless, the new mortgage approval figures remain among the lowest on record, and down 31.3 per cent on January 2007. There was little in the data to shift the expectation of a stagnant real-estate market in 2008, and the suspicion that first-time buyers are finding it difficult to obtain a mortgage.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said, ‘while first-time buyers may be struggling to find finance to get a foot on the residential ladder, there are increasing opportunities to refinance for those who already own property. This reflects the greater willingness on the part of lenders to pass on base rate cuts to this group of borrowers. It does, however, throw into sharp relief the claim that a weaker housing market will necessarily be good news for first-time buyers.’

There is also evidence of the credit crunch hitting the credit card and unsecured personal loan market. New spending on credit cards fell to £7.3bn last month from £7.4bn in December, and new loans dropped £100m to £2.6bn in January, down 6.5 per cent on a year earlier.

David Dooks, statistics director at the BBA, said, ‘despite strong volumes of retail sales, card transaction volumes were little changed and spending was more than offset by repayments. Overall consumer credit remained subdued.’

As well as banks being less willing to lend, households are less keen to borrow, Mr Dooks explained. ‘The focus on the household budget is stronger, with higher petrol prices and utility bills meaning that people have to be more careful with their expenditure.’

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