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A Recipe For A Housing Crash!

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A Recipe For A Housing Crash!

Report by Cliff D'Arcy

First of all, let me start by saying that I'm not an economist and, indeed, I've never been formally taught this subject. However, after eighteen years in financial services, I'm confident that I have a good understanding of what makes consumers tick when it comes to money matters. Sadly, all the information that I've collected leaves me worried about our nation's finances as a whole.

Here are eleven warning signs which suggest a bleak outlook for many households:

1. No trend continues forever

Every gambler knows that winning or losing streaks are just that: streaks, with a beginning and an end. US economist Herbert Stein phrased this as, "If something can't go on forever, it will stop."

Since 1945, UK domestic property prices have doubled, on average, every 8½ years. However, the average house price doubled in the five years from the start of 2000 to the start of this year, an annual growth rate of almost 15%. This is my first worry, because when trends deviate significantly from their long-term average, they have a habit of correcting themselves. This tendency, known as "reversion to the mean" suggests that, after years of runaway house prices, we should brace ourselves for a correction. Indeed, I was a homeowner up until recently but I'm currently sitting out of the market by renting.

2. We manage our money terribly

According to one financial watchdog, we Brits spend around £110 for every £100 of take-home pay. Given that our take-home pay will be around £825 billion this year, we are over-spending to the turn of over £80 billion a year. What's more, we've been funding this bender through borrowing.

Indeed, in 2004, we borrowed £51 billion against our homes. However, the cooling housing market has put the brakes on this bad habit, known as mortgage equity withdrawal, so we'll have to cut back or find another way to keep subsidising our lifestyle! If you can't make ends meet, or suffer from financial mismanagement, learn to budget today!

3. Our bills are rising fast

Oil and gas prices have rocketed in the last three years, which has pushed up domestic energy prices and the cost of petrol and diesel. Hence, a bigger proportion of our disposable income now goes on energy costs. What's more, housing expenses (particularly council tax) have leapt, up about 6% in 2004/05, so homeowners are feeling the pinch.

The government's favourite measure of inflation (rising prices, see What Inflation Means To You) recently hit 2.4%, the highest figure since the start of 1997. Sadly, our take-home pay is rising only slightly faster than this (it crept up by a mere 3% in 2004), so our bills really are beginning to bite!

Slash your household bills in our Get Out of Debt centre!

4. We've become addicted to debt

According to Bank of England figures released this morning, at the end of August, we owed over £56 billion on our credit cards and a further £134 billion on personal loans, overdrafts, etc., making our total unsecured lending £190 billion.

Just before this government took office in May 1997, the total was £80 billion, so our non-mortgage debt has increased by £110 billion in less than 8½ years. In other words, our plastic and other debt has been rising by a chunky 11% a year, which is a recipe for ruin for many borrowers!

Why pay interest on your debts? Get a 0% credit card today

You'll find the UK's cheapest personal loan in our Loans centre!

5. Our mortgage burden is getting heavier

Today's Bank of England figures show that we owe £932 billion to mortgage lenders. With the average mortgage rate at about 5.5% a year, this mountain of secured debt is costing us around £51 billion a year in interest. In June 2004, the Bank of England's base rate was the same as it is now (4.5% a year), but our mortgage debt was £827 billion. So, thanks to our mortgage debt climbing by £105 billion over this period (up 13%), even after the latest 0.25% cut to the base rate, we are still paying much more in mortgage interest than we were fifteen months ago.

Track down a happier home loan in our Mortgage centre!

6. Our economy is stumbling

Earlier this year, chancellor Gordon Brown predicted that the UK economy would grow by 3% to 3½% in 2005. However, this prediction has proved to be wildly optimistic, thanks to a slowdown in spending as consumers begin to tighten their belts. Several commentators (including me) have argued for a long time that the chancellor's "economic miracle" has been nothing more than one long borrowing binge.

For the record, the International Monetary Fund expects the UK economy to grow by as little as 1.9% a year, which would leave the Treasury far short of its income target. Hence, falling tax takings and ever-rising public spending suggests that tax increases could be on the cards next year. Indeed, covering the expected shortfall of £10 billion in the governments' spending plans would mean the basic rate of income tax rising to from 22p in the pound to 25p. So, expect a whole raft of stealth taxes and other trickery at the next Budget!

Learn more in How To Dodge The Financial Hurricane

7. Unemployment is rising

According to the Office for National Statistics, the number of people out of work and claiming benefit rose for the seventh month in a row to hit 866,200 last month, up 52,400 during 2005. The government's preferred unemployment figure, which measures the number of people out of work and seeking employment, hit 1.42 million in August.

Although the level of unemployment is low by historical standards, I expect it to begin rising, thanks to tough conditions on the high street and in manufacturing.

Protect your home against job loss with unemployment insurance from helpupay!

8. Retailers are having a tough time

As consumers begin to curb their 'desire to acquire', many retailers are struggling to hit their sales and earnings targets. For example, the John Lewis group last week warned that current trading conditions are the harshest it's seen since 1990.

Sadly, falling sales and profits on the high street usually lead to one of two outcomes: large-scale redundancies or business failures. For example, retail group B&Q announced 400 job cuts earlier this month, 1,700 jobs are at risk at sportswear retailer Allsports, which went into administration two days ago, and 500 jobs are under threat at Furnitureland, which collapsed last week.

9. We don't have enough to fall back on

Although UK residents have around £541 billion on deposit, this money is massively unevenly distributed, with the rich and super-rich owning about three-quarters of this pot. Sadly, three out of ten adults (30%) have £500 or less in savings, and almost one in eight (12%) have no cash cushion whatsoever. Ouch!

Without a few months' wages in the bank, you're up the proverbial creek without a paddle if things take a turn for the worse. If you fall ill, have an accident or lose your job, you can't rely on the State, because the government safety nets are practically non-existent! I warned how little State support there is for homeowners in When Mortgages Turn Nasty!

Find a superior savings account in our Savings centre!

10. We're not investing enough

One bright spot is that stock-market investors are having another great year, with the FTSE All-Share index up about a seventh (14%) in the year to date, plus dividends on top. The stock market has risen strongly since the blue-chip FTSE 100 index hit a low of 3,287 on 12 March 2003. Now, 2½ years on, the Footsie is 5,488, up two-thirds (67%) from its low, plus income on top. Yippee!

Although many of us have benefited from this comeback, thanks to better returns from our pension funds, savings plans and so on, we've not done as well as we could have. That's because millions of investors were scared off by three years of falling market from 2000 to 2002. For instance, in the 2003/04 financial year, which ended on 5 April 2004, investors pumped a total of £2.5 billion into tax-free shares ISAs. In the 1999/2000 tax year, this figure was £16 billion, more than six times higher.

Since 1918, the UK stock-market has produced an average annual return of 11%, with income reinvested, beating cash, bonds and property. Of course, it saves its greatest rewards for the most patient investors, but I believe that the market still has further to go, thanks to rising corporate profits.

Get a cheap, flexible, tax-free investment in our Index Tracker centre!

11. Our saving for retirement is pathetic

As we explained on Monday in Avert Your Own Pension Crisis, around twenty million people of working age are not currently contributing to a company or personal pension. Indeed, only fifteen million people are saving for retirement via pensions, which means that about five-ninths (55%) of working-age adults have no pension planning in place. This is an economic time bomb, since millions of people will have to decide between buying a house and funding their retirement. Whichever way they choose, financial hardship will follow. Aaargh!

Find Stakeholder and self-invested personal pensions in our Pensions centre!

If I've played my cards right, this article will shock you into doing something to strengthen your personal finances, and my cunning plan will have worked!


Edited by libitina

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  • 317 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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