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Zombie Households

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http://blogs.telegraph.co.uk/finance/edmun...bie-households/

The rise and rise of zombie households

By Edmund Conway Economics Last updated: August 15th, 2009

What should one make of the fact that, according to figures from the Council of Mortgage Lenders, the number of properties being repossessed in the second quarter of the year dropped? Indeed, it actually fell by 10pc on the quarter. Might this be another sign that the housing crash is now at an end?

While there will be plenty of people who will certainly interpret as that, I am rather more sceptical. In the first place, although repossessions are down somewhat on the quarter, they are still up quite sharply compared with last year.Indeed, the half-yearly rate of repossession is pretty similar to that of the last housing crash.

But what if the CML figures do indeed portend a genuine and sustained fall (or perhaps let’s say a plateau) in repossessions? Is this not another clear sign that the worst of the pain is now over? Not quite. The main reason the number of homes being taken into possession is so low is that the Bank of England has slashed interest rates so low. Any customer with a standard variable rate mortgage has seen a major fall in their debt servicing costs in the past year; most households, those at least who have paid off a reasonable amount of their debt, should be able to remortgage at not much more than they were previously (the Bank of England rate cut has been offset by the premium they are now charging because of the financial crisis).

Roll back to the 1990s and the story was very different indeed. That was the archetypical interest rate-driven recession – in other words where households were suddenly plunged into a world of pain when the Government, seeing the impending crash, raised interest rates too late and too fast. You can see this in the graph above. The red line is a representation of the average loan rate from banks (in this case for prime lending to businesses, but it serves as a decent proxy for borrowing costs charged to households, even if it spikes too high in some places); the blue line is the CML’s repossession rate (my datastream graphics mcguffin hasn’t yet updated it for the latest figure, so try to imagine a slight fall right at the end).

The pattern is clear. In the early 1990s the repossession spike coincided with a massive increase in mortgage costs. This time the spike has come at the same time as a sharp fall in mortgage costs. In other words, we should not presuppose from the fall in foreclosures that our housing market and its inhabitants are suddenly in a far better financial condition than previously supposed.

Instead, what is more likely is that the pain, once again, has merely been deferred rather than actually avoided. Hundreds of thousands of households are clinging onto their properties by virtue of the perverse interest rate environment we’re living in at the moment, but the moment rates start to rise they will be smashed by the rise in their debt costs. I’ve written before about the idea of “zombie householdsâ€, which rather like the zombie banks in Japan in the 1990s are kept in a semi-alive state by artificial assistance from the state, but because of this are never incentivised to take action and clean up their balance sheets.

I happen to believe that the Bank of England’s decision to cut rates to such lows earlier this year was the right thing to do. Notwithstanding the zombie creation, it will help give some of the more responsible and guiltless households more breathing space to sort their affairs and ensure they do not unnecessarily have to face the ignominy of losing their homes. But we have to face up to the consequences of taking such radical action with interest rates: that the recovery will take far longer than in previous recessions.

The Bank is aware that every time it tries to tighten the screw on the economy by raising rates it will be consigning an extra cohort of households to losing their homes. Not pretty, but the only way out of this mess without creating a nasty inflationary mess thereafter.

For all of the above reasons, one suspects that although repossessions may not hit the sharp peaks they did in the early 1990s, that they will stay higher for far longer than they did back then. Particularly if unemployment keeps creeping ever higher, as I am convinced it will. All of which is another reason why it is still far too early to declare an end to the great housing crash of the 2000s.

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We are living in a zombie nation.

Low central bank base rates could be around for a very long time. However this does not mean the consumer will have low interest rates.

It's catch 22.

This could take decades to resolve.

Edited by interestrateripoff

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Guest skullingtonjoe
We living in a zombie nation.

Low central bank base rates could be around for a very long time. However this does not mean the consumer will have low interest rates.

It's catch 22.

This could take decades to resolve.

How about zombie cities? Portsmouth`s a good example. :lol:

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http://blogs.telegraph.co.uk/finance/edmun...bie-households/

The rise and rise of zombie households

By Edmund Conway Economics Last updated: August 15th, 2009

What should one make of the fact that, according to figures from the Council of Mortgage Lenders, the number of properties being repossessed in the second quarter of the year dropped? Indeed, it actually fell by 10pc on the quarter. Might this be another sign that the housing crash is now at an end?

While there will be plenty of people who will certainly interpret as that, I am rather more sceptical. In the first place, although repossessions are down somewhat on the quarter, they are still up quite sharply compared with last year.Indeed, the half-yearly rate of repossession is pretty similar to that of the last housing crash.

But what if the CML figures do indeed portend a genuine and sustained fall (or perhaps let’s say a plateau) in repossessions? Is this not another clear sign that the worst of the pain is now over? Not quite. The main reason the number of homes being taken into possession is so low is that the Bank of England has slashed interest rates so low. Any customer with a standard variable rate mortgage has seen a major fall in their debt servicing costs in the past year; most households, those at least who have paid off a reasonable amount of their debt, should be able to remortgage at not much more than they were previously (the Bank of England rate cut has been offset by the premium they are now charging because of the financial crisis).

Roll back to the 1990s and the story was very different indeed. That was the archetypical interest rate-driven recession – in other words where households were suddenly plunged into a world of pain when the Government, seeing the impending crash, raised interest rates too late and too fast. You can see this in the graph above. The red line is a representation of the average loan rate from banks (in this case for prime lending to businesses, but it serves as a decent proxy for borrowing costs charged to households, even if it spikes too high in some places); the blue line is the CML’s repossession rate (my datastream graphics mcguffin hasn’t yet updated it for the latest figure, so try to imagine a slight fall right at the end).

The pattern is clear. In the early 1990s the repossession spike coincided with a massive increase in mortgage costs. This time the spike has come at the same time as a sharp fall in mortgage costs. In other words, we should not presuppose from the fall in foreclosures that our housing market and its inhabitants are suddenly in a far better financial condition than previously supposed.

Instead, what is more likely is that the pain, once again, has merely been deferred rather than actually avoided. Hundreds of thousands of households are clinging onto their properties by virtue of the perverse interest rate environment we’re living in at the moment, but the moment rates start to rise they will be smashed by the rise in their debt costs. I’ve written before about the idea of “zombie householdsâ€, which rather like the zombie banks in Japan in the 1990s are kept in a semi-alive state by artificial assistance from the state, but because of this are never incentivised to take action and clean up their balance sheets.

I happen to believe that the Bank of England’s decision to cut rates to such lows earlier this year was the right thing to do. Notwithstanding the zombie creation, it will help give some of the more responsible and guiltless households more breathing space to sort their affairs and ensure they do not unnecessarily have to face the ignominy of losing their homes. But we have to face up to the consequences of taking such radical action with interest rates: that the recovery will take far longer than in previous recessions.

The Bank is aware that every time it tries to tighten the screw on the economy by raising rates it will be consigning an extra cohort of households to losing their homes. Not pretty, but the only way out of this mess without creating a nasty inflationary mess thereafter.

For all of the above reasons, one suspects that although repossessions may not hit the sharp peaks they did in the early 1990s, that they will stay higher for far longer than they did back then. Particularly if unemployment keeps creeping ever higher, as I am convinced it will. All of which is another reason why it is still far too early to declare an end to the great housing crash of the 2000s.

obviously the low interest rates help, but i read something the other day that implied one shouldn't look at reposessions for an indication of problems, one should look at mortgage deliquencies. The Government are hoping that by keeping people in their houses for long enough everything will get back to normal. If it doesn't, expect expect a sudden 'rush for the door'.

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How about zombie cities? Portsmouth`s a good example. :lol:

I feel a Left4Dead map coming on.... :-) Would probably earn you a visit from the counter terrorist squad however.

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obviously the low interest rates help, but i read something the other day that implied one shouldn't look at reposessions for an indication of problems, one should look at mortgage deliquencies. The Government are hoping that by keeping people in their houses for long enough everything will get back to normal. If it doesn't, expect expect a sudden 'rush for the door'.

but mortgage delinquencies will be lower because of low interest rates....

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