Sunday, Jun 17, 2007
Britain's debt splurge coming home to roost
Telegraph: £1.3 trillion in debt
The day of reckoning has come for a debt-soaked society that has seen outstanding household loans double to £1.3 trillion in just seven years.
In a deliberate new policy of blunt-speaking, Mervyn King eschewed the normally equivocal language of central bankers to warn that if we don't change our free-spending ways, he will - by pushing up interest rates until the growing threat of inflation is eliminated.
A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash," says Robert Bryant-Pearson, of Allied Surveyors. "Everyone seems to forget what happened between 1990 and 1993: the repossessions, the negative equity. The problem now is that people's borrowing in relation to their income is extremely high."
16 Comments
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1. little professor said...
"I doubt the housing market can even take another quarter point," adds Ray Boulger, one of the most respected mortgage commentators. "Only in London, Scotland and Northern Ireland are house prices still climbing. Another rate rise would choke this off and push prices in much of the rest of the country into reverse."
To make matters worse, the biggest impact of higher mortgage rates is still to come for many homeowners. Analysts at Credit Suisse estimate a million borrowers who took advantage of cheap two-year fixed rate loans at the end of 2005 are about to experience the shock of their lives.
James Callaghan, a civil servant in Darlington is typical of those discovering the painful new reality: "If we stick with our current mortgage lender, our mortgage rate will jump from 4.94 per cent to 6.75 per cent."
Of course the Bank of England doesn't want to bring things to a crashing halt. But Government bungling has muddied the waters, making it harder to assess the true state of the housing market by encouraging an artificial spike in activity before the (now postponed) introduction of Home Information Packs.
2. harold said...
This is ironic indeed: words of caution from the man behind the policy of cheap credit and personal debt. Rather than finger wagging at the British public he should be falling on his own sword.
3. talking rot said...
I only managed to read as far as ""A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash," says Robert Bryant-Pearson, of Allied Surveyors, the largest independent property valuer." before I had to close the article and log onto this Blog site.
Oh dear, what a pity, never mind.
Perhaps the era of declining house prices is close, caused not by a single easy to understand factor, but by a combination of inter-related complex factors:
1. Rising interest rates.
2. Falling disposable incomes caused by ever increasing invisible taxation.
3. Falling disposable incomes caused by ever increasing living costs that are not within the CPI.
4. Rising cost of imports due to higher oil costs.
5. Declining value of GBP in the face of preparation for the General Election 2010.
6. Tightening of lending criteria.
7. A cold in the US economy.
8. Increasing legisation due to European integration resulting in declining productivity.
9. The 2012 Olympics causing localized inflation but falling wages owing to temporary immigration.
10. Investors switching from property to different investment vehicles.
Sorry. Don't mean to be too gloomy today.
4. denzil said...
This type of article really gets on my nerves because it is not broad enough in its finger pointing.
I think it is fair to say that Mervyn King is a ditherer and has allowed consumer debt to run amock BUT it was back in Eddie George's day that he was told to cut rates to divert recession after 9/11. That was all well but somebody forgot to tell the MPC that they did have to go up again. Gordon Brown soon realised that low IR's could be his saviour and sustain the mirage of an miracle economy and maintain his so called record of consecutive quarters of economic growth. Just for good measure growth has been helped of course by rediculously high migration to the UK, thus adding to the work force and also over inflating property prices massively.
Sadly I'm wondering if the press will ever wake up the shafting Gordon Brown has repeatedly performed to the UK public.
His policies are based on the here and now and the way they reflect him.
His reward!?! He will be the officially unelected prime minister of the country. What a crazy world we live in.
Brown does get some mention in the article which is in-keeping with my view:
"Gordon Brown has also been living on the never-never, allowing UK public borrowing to climb and hiding even more government debt in such schemes as the private finance initiative, which store up liabilities for future generations. Unfunded public pensions and student loans (estimated to leave those graduating in 2009 with an average £30,000 debt) are other growing forms of inter-generational borrowing."
5. sovietuk said...
"In extreme cases, the repayments on a £400,000 interest-only mortgage would increase from about £1,400 a month to about £2,000, up by 43 per cent."
What idiot would take out a £400,000 interest only mortgage?
6. confused76 said...
"What idiot would take out a £400,000 interest only mortgage?"
every single FTB and BTL who bought any 2+ bedroom in Central London (Westminster, Ken, Camden...) has a £400k mortgage (i.e. roughly 60-70% of the property price). Since rates have climbed in the past year, many people have remortgaged from 25 years to interest only. There are families round where I live who put 60% of their take home pay (post tax) in the mortgage, often just for the interests
recent BTLs have bought on the expectancy to hike the rents by more than 30% just to break even with mortgage payments and service charges. lenient valuers have signed off on the rent valuations to convince banks to lend the money.
London is in for a nasty shock after the summer
7. harold said...
"I think it is fair to say that Mervyn King is a ditherer..."
I'm afraid Denzil you are being too generous. King knew all along what was going on. He is profoundly cynical; in short, a crook.
8. Ticktock said...
I should imagine that Goldman Sachs 'old boy' Mr. King is not the fool people think he is. His problem really is in maintaining the illusion that the Bank of England represents the interests of England, and the English.
Much deception is required in maintaing such a fiction and the concequence of failure will likely be very high, and moreover, very ugly indeed.
After all, history (real history) has a nasty habbit of repeating itself.
9. Scott said...
If this was happening in a communist country, we would label them as backward and corrupt.
10. Essex57 said...
Talking rot said:
Perhaps the era of declining house prices is close, caused not by a single easy to understand factor, but by a combination of inter-related complex factors:
1. Rising interest rates.
2. Falling disposable incomes caused by ever increasing invisible taxation.
3. Falling disposable incomes caused by ever increasing living costs that are not within the CPI.
4. Rising cost of imports due to higher oil costs.
5. Declining value of GBP in the face of preparation for the General Election 2010.
6. Tightening of lending criteria.
7. A cold in the US economy.
8. Increasing legisation due to European integration resulting in declining productivity.
9. The 2012 Olympics causing localized inflation but falling wages owing to temporary immigration.
10. Investors switching from property to different investment vehicles.
----------------------------------------------------------------------------------------------------------------------------------------
I would also add:
11. The fall in the Spain/Florida property markets, as many UK house owners are tied into a second house abroad
12. The epidemic of squatting, or other action by what the houseowners would term the 'have-nots'
13. Costly and escalating war on terror, or other worldwide events
14. Foreign equity withdrawal from the housing market
15. Tightening of escape routes for mortgage defaulters, such as IVPs etc. on which the government and lenders are beginning to tighten the noose
16. The number of people coming off fixed rate mortgages
17. The increasing number of 100% mortgages
18. The aviabilty of information, such as the new 'property snake website that counters the frivolous stories put out by Estate agents
There are many more of these factors that inevitably will lead to a market crash, in 2008, most likely, although I believe it has already begun in 2007. Which day will historians point to the moment ay of the crash? July 2004, Jan 2006, April 2007?
11. Asdasd12345 said...
Economists at central banks are not stupid people. They have spent years studying the economics and could manage to run one perfectly if they had the chance. In other words, they know exactly what they are doing, and these aren't mistakes. This is a planned recession that we are coming up to. I am guessing the UK will have the Euro as a currency soon.
12. inbreda said...
"In extreme cases, the repayments on a £400,000 interest-only mortgage would increase from about £1,400 a month to about £2,000, up by 43 per cent."
Surely the size of your mortgage makes no difference - it is the proportion of your take home that counts.
For example, someone with a £4 mortgage would find their payments increasing from 1.4 pence to 2 pence, up by 43%.
The interesting consideration is that if someone is spending 60% of their take home on the mortgage, then this increase represents a 43% increase on the 60%, i.e. 25.8%.
So they go from spending 60% of their takehome on the mortgage to paying out 85.8%.
Basically 70% is the absolute limit, as a 43% rise takes it over 100%. With all the self certs that have gone on, I imagine some people will find themselves in this position. Hopefully all BTL.
13. Whiteknight said...
Bit late for stern words.
Probably time to get the lock down in place. Law and order will be the next thing to go.
14. Orwell said...
City economists expect the response to come by August, increasing interest rates from 5.5 to 5.75 per cent. But the real fear is that this will not be enough and that 6 per cent interest rates will be with us by the autumn.
This could make for a rocky Christmas...Property experts fear the housing market may not be able to cope
"A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash," says Robert Bryant-Pearson, of Allied Surveyors, the largest independent property valuer. "Everyone seems to forget what happened between 1990 and 1993: the repossessions, the negative equity. The problem now is that people's borrowing in relation to their income is extremely high."
EXACTLY MR DOUBLE BARRELLED SURNAME !!!
15. Orwell said...
"Gordon Brown has also been living on the never-never, allowing UK public borrowing to climb and hiding even more government debt in such schemes as the private finance initiative, which store up liabilities for future generations. Unfunded public pensions and student loans (estimated to leave those graduating in 2009 with an average £30,000 debt) are other growing forms of inter-generational borrowing."
NO, YOU DON'T SAY!
16. Flintster said...
Ticktock,
"His problem really is in maintaining the illusion that the bank of England represents the interests of England, and the English."
What year is it? Have I been in a coma and woken up post UK break up? What year is it? Anyone?