Borrowers Are Facing A Mortgage 'fiscal Cliff'

[NEO72]

I'm guessing the Express aren't leading with this..

If inflation predictions are met over the next five years, borrowers could end up with as little as £56 in disposable income each month, a new report warns. The Mortgage Fiscal Cliff research by analysts Acenden predicts that if inflation averages at 2.5 per cent in the next half-decade households could see an 82 per cent drop in the cash they have available after repaying their mortgage and other regular demands.

The future's still pretty bleak for borrowers. If inflation averages at a lower forecast rate of 1.8 per cent, it would mean borrowers will still experience a significant 42 per cent drop in spending money, with only £130 left per month. The research also forecasts how a rise in interest rates alone, without any increase in inflation or wages, would have a similarly negative impact.

An increase of just 2 per cent to interest rates would cut monthly affordability by £184 to just £126.

Alex Maddox of Acenden warned: "If we see higher inflation and interest rates without wages growing then we will start to see a deeper and worrying problem. Given the realistic possibility of price inflation remaining above interest rates and wage growth, there will be inevitable impacts on monthly affordability for borrowers."

However, if the economy recovers and wages rise, that would have a huge positive impact. If salaries climbed 2.5 per cent over the next five years, Acenden forecasts monthly affordability would increase by £609.

Link

So basically, borrowers get burnt via cost inflation in the absence of wage inflation, or through interest rate rises to stem the inflation. Of course TPTB will choose the former route as then it can all be blamed on 'external factors'.

But hey it'll all be ok providing we all get real wage increases of 2.5% p.a.

[porca misèria]

I'm guessing the Express aren't leading with this..

Link

So basically, borrowers get burnt via cost inflation in the absence of wage inflation, or through interest rate rises to stem the inflation. Of course TPTB will choose the former route as then it can all be blamed on 'external factors'.

But hey it'll all be ok providing we all get real wage increases of 2.5% p.a.

It's gibberish. Your misinterpretation of it ("real wage increases") even more so.

[zugzwang]

I'm guessing the Express aren't leading with this..

Link

So basically, borrowers get burnt via cost inflation in the absence of wage inflation, or through interest rate rises to stem the inflation. Of course TPTB will choose the former route as then it can all be blamed on 'external factors'.

But hey it'll all be ok providing we all get real wage increases of 2.5% p.a.

I hope you're right but it's not a foregone conclusion.

Canadian unit labour costs, for instance:

Of course, Canadians need wage inflation for the same reason we do - to pay off their stratospheric mortgages.

[NEO72]

It's gibberish. Your misinterpretation of it ("real wage increases") even more so.

Well perhaps you'd do me the honour of enlightening me, oh wise one.

[porca misèria]

Well perhaps you'd do me the honour of enlightening me, oh wise one.

Oh dear.

It's a scenario that says if one variable changes while everything else remains fixed, then some conclusion follows.

Such hypothetical cases are somewhat useful, but only so long as you don't confuse them with the real world, where for example you adapt to a change in circumstances by changing your behavior.

At 20 you do intensive physical exercise and feel good. Do the same at 50 and you give yourself a heart attack. But if you turn that into a story saying olympic athletes will have heart attacks at 50, I'll call that gibberish too (some will, most won't).

[NEO72]

Wow, you call it gibberish and post this..irony knows no bounds.

[Giordano Bruno]

Oh dear.

It's a scenario that says if one variable changes while everything else remains fixed, then some conclusion follows.

Such hypothetical cases are somewhat useful, but only so long as you don't confuse them with the real world, where for example you adapt to a change in circumstances by changing your behavior.

At 20 you do intensive physical exercise and feel good. Do the same at 50 and you give yourself a heart attack. But if you turn that into a story saying olympic athletes will have heart attacks at 50, I'll call that gibberish too (some will, most won't).

'What ifs' are important. Some scenarios can be responded to easily and some cannot. It's easier to stop exercising strenuously than to pay less or no mortgage, to give a simplified example. These doomsday scenarios help correct the over-optimistic sentiment that fuelled the bubble and serve as a warning to prospective buyers or investors.

[@contradevian]

Oh dear.

It's a scenario that says if one variable changes while everything else remains fixed, then some conclusion follows.

Such hypothetical cases are somewhat useful, but only so long as you don't confuse them with the real world, where for example you adapt to a change in circumstances by changing your behavior.

At 20 you do intensive physical exercise and feel good. Do the same at 50 and you give yourself a heart attack. But if you turn that into a story saying olympic athletes will have heart attacks at 50, I'll call that gibberish too (some will, most won't).

The fact is that interest rates can rise faster than you can increase your income or cut expenditure. FACT. I've been caught myself during the 80's with eye watering interest rate rises.

Todays interest rates are little more than teaser rates, to apparently reflect an economic crisis, even worse than when Hitler was bombing London and about to invade (or so we are led to believe).

[NEO72]

'What ifs' are important. Some scenarios can be responded to easily and some cannot. It's easier to stop exercising strenuously than to pay less or no mortgage, to give a simplified example. These doomsday scenarios help correct the over-optimistic sentiment that fuelled the bubble and serve as a warning to prospective buyers or investors.

Thing is though, its not even a doomsday scenario (e.g. a currency collapse and sudden jump in the base rate) - its pretty much a continuation of current trends i.e. cost inflation running above wage inflation. And unless you work in the OBR, there's nothing to suggest this is likely to change in the short/medium term.

[frederico]

Thing is though, its not even a doomsday scenario (e.g. a currency collapse and sudden jump in the base rate) - its pretty much a continuation of current trends i.e. cost inflation running above wage inflation. And unless you work in the OBR, there's nothing to suggest this is likely to change in the short/medium term.

Why would it change? Real economics are extremely simple.

The money supply, fiscal loosening or tightening economics conveniently ignore the real world.

The magic growth in Canadian wages, if true must be driven by another factor. This will be cheap energy, raw materials, a new lucrative market.

The UK cost base or overheads are simply too high already and are growing at an undocumented out of control rate.

The government has reduced borrowing costs to a minimum, but this is simply being offset by increased energy food and building costs. Nothing is being done to address these costs. Its obvious that wage increases will simply add to costs and more businesses failing or moving abroad.

Increasing money supply is completely pointless if your economy is too uncompetitive to expand.

[stormymonday_2011]

I'm guessing the Express aren't leading with this..

Link

So basically, borrowers get burnt via cost inflation in the absence of wage inflation, or through interest rate rises to stem the inflation. Of course TPTB will choose the former route as then it can all be blamed on 'external factors'.

But hey it'll all be ok providing we all get real wage increases of 2.5% p.a.

So what is new here. The original financial crisis in 2008 was largely due to the fact that asset price inflation was rising faster than earnings. The funding gap was covered by increased borrowing. This worked just so long as the interest on the loans could be paid out of earnings. The 2008 financial crisis was triggered when interest rates rose and borrowers were unable to pay not just the principal but also the interest on their loans. Politicians and central banks have tried to fix that problem by slashing interest rates and providing extra cash via QE (ie shrinking the funding gap) . This has been partially successful particularly in countries such as the USA where asset prices such as property also underwent a major correction. It has solved nothing in places such as the UK where the fall in property prices has been less marked or ,as in the case of London, non existent. The net result of the failure to address that funding gap between earnings and expenditure is that it still exists and is growing which means that the next time borrowing costs rise or liquidity tightens again the whole sorry mess of 2008 will be repeated just on a bigger scale.

Edited May 12, 2013 by stormymonday_2011

[R K]

Bizarre article.

"If wages fall you'll be worse off" No sh1t.

"If we see higher inflation and interest rates without wages growing

Wages are growing.

[porca misèria]

So what is new here. The original financial crisis in 2008 was largely due to the fact that asset price inflation was rising faster than earnings.

Up to a point, Lord Copper. That in itself need not be a problem, but ...

The funding gap was covered by increased borrowing. This worked just so long as the interest on the loans could be paid out of earnings.

Indeed, but again not quite the whole story.

The 2008 financial crisis was triggered when interest rates rose and borrowers were unable to pay not just the principal but also the interest on their loans.

That's an oversimplification. It wasn't the fact, it's the realisation of that fact, that triggered the crisis.

Politicians and central banks have tried to fix that problem by slashing interest rates and providing extra cash via QE (ie shrinking the funding gap) . This has been partially successful particularly in countries such as the USA where asset prices such as property also underwent a major correction. It has solved nothing in places such as the UK where the fall in property prices has been less marked or ,as in the case of London, non existent. The net result of the failure to address that funding gap between earnings and expenditure is that it still exists and is growing which means that the next time borrowing costs rise or liquidity tightens again the whole sorry mess of 2008 will be repeated just on a bigger scale.

They're trying to walk a tightrope between that scenario and Weimar inflation.

They may well succeed in avoiding either of those scenarios. That'll come at the cost of some new and different manifestation of financial meltdown on whose nature we can but speculate.

[porca misèria]

Bizarre article.

"If wages fall you'll be worse off" No sh1t.

Wages are growing.

Bingo!

These are valid questions to look at ("parametric studies" in the jargon). But not for some idiot journo to turn into nonsensical conclusions.

[Si1]

Bizarre article.

"If wages fall you'll be worse off" No sh1t.

Wages are growing.

+1

well yes, but the subtext that I read is that wages are not growing fast enough to stave off in interest rate spike - and besides, those with the scariest loan to income ration are in jobs with wage stagnation in recent years - finance (finally...), public sect and journos

[Si1]

They may well succeed in avoiding either of those scenarios. That'll come at the cost of some new and different manifestation of financial meltdown on whose nature we can but speculate.

well, SOMETHING is going to lose a h3ll of a lot of extrinsic value - my guess is it will be housing and gold

[stormymonday_2011]

That's an oversimplification. It wasn't the fact, it's the realisation of that fact, that triggered the crisis.

Hmm. I think it was real world events that kicked the whole show in motion back in 2008 not just changes in perception

It was the rise in defaults at the margin (ie particularly in the sub prime lending community in the US) which prompted investors to look at the quality of all lenders loans. Once that began the realisation of the potential losses quickly snowballed into an avalanche of 'bad news' The fact most borrowers did not default was due mainly to governments and central banks rescuing them with rock bottom interest rates. If the true risk had been priced in to the interest rates on their loans it would have been a different story. People underestimate how much major economic changes are driven by price setting at the margin. Unsurprisingly last time it was western sub prime borrowers who exposed the mismatch between earnings and asset prices. Next time the trigger will be may not be the obvious ones on my list as you rightly pointed out. (ie it is quite possible that a collapse in asset prices outside the mainstream western economies could trigger the same sort of meltdown). I still think we are in a bubble economy particularly in the UK

Edited May 12, 2013 by stormymonday_2011

[wonderpup]

However, if the economy recovers and wages rise

But we are told that economic recovery depends-in part- on wages not rising, given the need to compete with all the cheaper labour overseas.

The cunning plan is to grab a larger share of aggregate demand by making ourselves more competitive by suppressing our own wages.

Which is a good idea unless everyone else tries to do the same. If they do then we have a comical outcome in which wages globally shrink in response to falling demand- demand that then falls further because that demand is nothing more than the aggregate spending power derived from...wages.

At which point a further call for wage suppression will be heard in order to capture a share of the now even smaller demand.

How long this goes on for probably depends on how long it takes for the great unwashed to discover they can no longer afford to feed their children.

[goldbug9999]

But we are told that economic recovery depends-in part- on wages not rising, given the need to compete with all the cheaper labour overseas..

Without an increase in productivity then wages vs prices is a zero sum game i.e. any change in one adversely effects the other and cancels it out.

[frederico]

Its not complicated, I don't understand why anyone doesn't get it, unless you can prove that real inflation is below wage rises, then in the end people are going to run out of money. If people run out of money then the banks go under and loads more businesses with them.

Wage rises will be very temporary without an improvement in productivity. Actually producing something would be a start.

[bearwithasorehead]

snip

Next time the trigger will be may not be the obvious ones on my list as you rightly pointed out. (ie it is quite possible that a collapse in asset prices outside the mainstream western economies could trigger the same sort of meltdown). I still think we are in a bubble economy particularly in the UK

Go on, give us a few guesses!!

[Harry Monk]

I don't know anybody, working in any sector, whose wages are increasing by anywhere near as much as inflation.

[Venger]

Wages are growing.

March 2013. (Middle)

Households in the middle of the income scale have been battered by wages falling in real terms and a rising cost of living since the financial crisis of 2008, with increasing food and fuel prices among the biggest pressures on family finances.

Yet when their gross household income, before tax and other elements is included, the total fell by as much as nine per cent, dropping from £36,400 in 2007/08 to £33,200 the figures show.

http://www.telegraph...generation.html

Feb 2013. (Low to middle)

Its report, Squeezed Britain 2013, shows that if low to middle earnings rose by the 1.1% a year above inflation achieved in the past, average annual household incomes in this group would take until 2023 to reach £22,000 – the equivalent of where they stood in 2008.

[Bruce Banner]

I don't know anybody, working in any sector, whose wages are increasing by anywhere near as much as inflation.

Politicians?

[zugzwang]

I don't know anybody, working in any sector, whose wages are increasing by anywhere near as much as inflation.

Bankers.