Zombie Households Trapped In Debt

[Cozza]

The snowball is really building up momentum now.

http://www.dailymail.co.uk/news/article-1326040/Millions-caught-cheap-home-loans-trap-walking-financial-oblivion.html

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Up to three million households are on a financial precipice – and in danger of falling over it if interest rates rise.

Leading economist Danny Gabay warned that a full-scale recovery will not take place until banks tackle the problem of the families who took out loans far beyond their means.

The former Bank of England expert’s warning about the ‘zombie households’ which could be tipped into financial oblivion when interest rates rise were echoed by a series of finance experts last night.

ne said many people were ‘living in a fool’s paradise’ because of low interest rates.

Mr Gabay did not estimate the number of households in peril.

But recent figures from the Council of Mortgage Lenders found that almost 3million borrowers could be plunged into difficulty if interest rates rise by 2 per cent.

Even at the current rock-bottom rates, almost 1.3million families are already grappling with mortgage payments that eat up more than 35 per cent of their after-tax income, the level at which the Financial Services Authority classes loans as ‘unaffordable.’

Mr Gabay said: ‘It is an extraordinary position to be in. Fixing government finances is important but is only part of the problem. The other, larger part, is fixing household finances, where in fact the crisis began.

‘It is very politically convenient to believe that the crisis was caused by greedy bankers but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much.’

Sold: But can people afford to buy?

Sold: But can people afford to buy?

Economists agree that rates cannot continue at their current 300-year low levels indefinitely, but most do not expect the Bank of England to begin raising them for at least a year.

However one member of the interest rate-setting monetary policy committee, Andrew Sentance, is calling for them to be increased sooner.

In a paper published yesterday, Mr Gabay, of economists Fathom Consulting, argued that the current low rates are allowing the banks to avoid facing up to potential bad loans on their books.

He urged the Government to create a ‘bad bank’ to buy up poor quality mortgages to cleanse the system.

‘The solution we are suggesting will be very painful in the short term but if we face up to our debts we can move on,’ he told a conference of experts.

‘We are in a situation that I am very worried about. Too much money has been lent against assets which have fallen in value but those losses have not yet been fully recognised. We are being kept alive on a near-zero interest rate drip and we can’t move forward.’

Fathom said banks are aware they are vulnerable to big write-offs in future, which is making them reluctant to lend.

Last night David 'Danny' Blanchflower, a former member of the monetary policy committee, said he ‘absolutely agreed’ with Mr Gabay’s analysis of the problem of potential zombie households.

He added: ‘Anyone who thinks that rates should be raised now or in the next year or two is living on another planet.’

Ray Bolger of mortgage brokers John Charcol said many homeowners will need to take a ‘reality check’ once the base rate returns to normal levels: ‘There are a lot of people who are being bailed out by the low rates.

'The longer rates stay low the more difficult they’ll find it to cut back as people will start to think of the non-essential spending as essential.’

Sukdhev Johal, reader in business policy at Royal Holloway, University of London, said: ‘There are many people living in a fool’s paradise because of low interest rates.

‘Everything is against people who have over-borrowed, including the threat of negative equity and rising unemployment. The only lifeline is low interest rates and if you take that away you could have properties coming on to the market in a fire sale.’

On Saturday, the Mail revealed how families are already facing the biggest squeeze on living standards in a generation.

Millions will be hit with huge rises in utility costs on top of hikes in other essential bills such as petrol. In a further blow, VAT is due to rise in January from 17.5 per cent to 20 per cent.

[stuckmojo]

the comments are good. Please feel free to do your duty and add yours plus arrows, of course.

[winkie]

...but many of these that are 'trapped in so called debt' would not be in that situation if they had not bitten off more than they could chew and if the irresponsible lenders had not given them what they wanted without considering due diligence...both of them IMO have made a rod for their own back, not only that it has priced out the responsible from owning through no fault of their own.....there is a time for everything.

[exiges]

‘It is very politically convenient to believe that the crisis was caused by greedy bankers but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much.’

My thoughts precisely.

David 'Danny' Blanchflower, said ‘Anyone who thinks that rates should be raised now or in the next year or two is living on another planet.’

Presumably the planet that's different from Danny's is Earth.

Edited November 3, 2010 by exiges

[moonriver]

‘Everything is against people who have over-borrowed"

Oh poor them, but how about how about the saver, who went without, so they could live within their means, whilst the feckless soaked up all this cheap credit?

Low interest rates are robbing savers.

[winkie]

Oh poor them, but how about how about the saver, who went without, so they could live within their means, whilst the feckless soaked up all this cheap credit?

Low interest rates are robbing savers.

Low interest rates are fine when the cost of living is low, savings are at the moment being stolen (unless you plan to buy a home in the next two or three years) everything is falling except what will be required to survive new bubbles on the horizon....interest rates will eventually have to go up.

[Toto deVeer]

zombie households == zombie banks == zombie government == zombie people.

zombies everywhere!

[General Congreve]

Oh poor them, but how about how about the saver, who went without, so they could live within their means, whilst the feckless soaked up all this cheap credit?

Low interest rates are robbing savers.

Not this saver. Transferred most of my savings into gold bullion. Result? Two fingers to the banks, cos they can't profit from my money through negative real interest rates, and a 30% return on my savings in 18 months. Nice.

Edited November 3, 2010 by General Congreve

[Georgia O'Keeffe]

Oh poor them, but how about how about the saver, who went without, so they could live within their means, whilst the feckless soaked up all this cheap credit?

Low interest rates are robbing savers.

alot of savers have done rather well out of being on the other side of the feckless borrower the last few years through the wider economic impact, swings and roundabouts,

[Toto deVeer]

Not this saver. Transferred most of my savings into gold bullion. Result? Two fingers to the banks, cos they can't profit from my money through negative real interest rates, and a 30% return on my savings in 18 months. Nice.

Hadn't thought about it from that perspective. Good reason to buy that gold.

[winkie]

Not this saver. Transferred most of my savings into gold bullion. Result? Two fingers to the banks, cos they can't profit from my money through negative real interest rates, and a 30% return on my savings in 18 months. Nice.

Out of interest, when you buy your gold who do you think your money is going to?

[RichB]

Even at the current rock-bottom rates, almost 1.3million families are already grappling with mortgage payments that eat up more than 35 per cent of their after-tax income, the level at which the Financial Services Authority classes loans as 'unaffordable.'

But it's fine for them to spend 50% of net income after taxes on rent right?

And is that 35% after council tax + tv, water and electric tax or does that not count? I assume it is gross of VAT...

[kingsgate]

No sign of zombies round here.

On current rentals, the base rate would have to hit something over 15% before we actually started losing money month on month.

OK, I know that if it got even halfway to 15%, the UK economy would pretty much collapse and we would need to buy shotguns, tinned food and then head out to find some rural defensible space to fend off the zombie hordes......

Each month rates stay low, we pay off a chunk more, pushing "zombie day" further into the future......

.

[libspero]

the comments are good. Please feel free to do your duty and add yours plus arrows, of course.

No need.. click on the "top rated"

All bearish

[neil324]

There's a thread on MSE where they all think there should be a debt amnesty, where the slate is wiped clean, all the housing debt should pass to the government and the people keep the houses for nothing.

WTF....?

I'm gobsmacked.

Edited November 3, 2010 by neil324

[NEO72]

No sign of zombies round here.

On current rentals, the base rate would have to hit something over 15% before we actually started losing money month on month.

OK, I know that if it got even halfway to 15%, the UK economy would pretty much collapse and we would need to buy shotguns, tinned food and then head out to find some rural defensible space to fend off the zombie hordes......

Each month rates stay low, we pay off a chunk more, pushing "zombie day" further into the future......

.

Good for you - well done

[RufflesTheGuineaPig]

There's a thread on MSE where they all think there should be a debt amnesia, where the slate is wiped clean, all the housing debt should pass to the government and the people keep the houses for nothing.

Amnesty?

[neil324]

Amnesty?

Thanks it's late

[thecrashingisles]

Thanks it's late

Debt amnesia sounds appropriate somehow.

[wherebee]

Debt amnesia sounds appropriate somehow.

I reckon that if things turn down further, there will be a bit push in the media for this. It will resonate well with the masses as well. Could happen.

[grey shark]

‘zombie households’ which could be tipped into financial oblivion when interest rates rise .

Debt is just modern day slavery .........

[cybernoid]

Maybe bono could do a concert.

[JustAnotherProle]

Debt is just modern day slavery .........

Gold is the currency of Kings. Silver is the currency of gentlemen. Barter is the currency of peasants. Debt backed paper is the currency of slaves. ~Steve Lazear

[Saving For a Space Ship]

Maybe bono could do a concert.

'LIVE DE8T'

'DEBT AID'

[wonderpup]

‘It is very politically convenient to believe that the crisis was caused by greedy bankers but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much.

I know for a fact that is impossible because the banks would have had tight lending criteria and would never have lent money to people at a rate of five times their income because that would have been utterly stupid and we all know that bankers are very clever and responsible lenders, since that is their core skillset.

Unless of course they got greedy- but that would mean they were....greedy bankers! Who caused the Crisis!