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Britain’S Consumer Credit Market Is A Giant Ticking Time Bomb

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Telegraph 11/8/14

'It is increasingly clear that Britain’s army of borrowers are being lulled into a false sense of security. The cost of borrowing is actually falling, not rising, a remarkable and little-understood state of affairs which is storing up immense problems for the future. The consumer credit market is a ticking time bomb; it beggars belief that so many folk and companies who should know better are so relaxed about it.

At some point, central banks, led by the Bank of England and the Federal Reserve, will start tightening monetary policy in earnest, and this is bound to eventually have a knock-on effect on the cost of consumer borrowing.

When this does happen, the shock to borrowers, practical as well as psychological, will be immense. But for the time being, they are laughing all the way to the bank and pocketing the gains created by the authorities’ obsession with subsidising credit.

The figures are remarkable and help explain why the number of first-time buyers shot up by 19pc year on year in June, reaching the highest level since 2007 and keeping the housing market boom on track. The recent regulatory changes to the mortgage market, which now involve borrowers having to disclose far more information about their expenditure patterns, only temporarily delayed the flow of credit.

Perhaps most surprisingly of all, the reduction in the number of financial institutions, and the fact that they must hold hugely more capital to protect themselves in case of losses, has still gone hand in hand with lower rates. Of course, the cost of borrowing would be even lower in the absence of these regulatory shifts but the scale of the changes are striking nonetheless.

The average mortgage rate paid by first-time buyers is down by 0.3 percentage points over the past year, an analysis by Citigroup reveals. The interest rate on the average two-year fixed mortgage with a 25pc deposit fell by 0.07pc month on month in July and the average rate on two-year fixed with a 10pc deposit fell 0.04pc. Both categories are down by more than one percentage point compared with two years ago.

It is not just secured loans that are getting cheaper. The average cost of borrowing £10,000 was just 5.12pc in July, down from 5.23pc in June and 6.10pc a year ago. It is now at the lowest level since data began in 1995.

As Michael Saunders, Citi’s chief economist, points out, the interest rate on a £10,000 unsecured loan is down 5.7 percentage points since late-2009 – in other words, it has more than halved since the height of the credit crunch. No wonder UK domestic car sales are booming.

Returning to secured loans, all of this helps to explain why mortgage costs have remained stable despite rocketing house prices. The capital and interest payment on the average mortgage has remained at 19.3pc over the past year, well below the 21.1pc seen on average since 2005.

Two other massive changes have taken the mortgage market by storm. No fewer than 90pc of the mortgages taken out in the second quarter were fixed-rate, the highest level for 20 years. The UK used to be known as the nation of floating mortgage rates, at least among property geeks; today, risk-averse borrowers are fixing, even though the duration of these deals remains extremely limited, at least by US or even continental standards.

Here again, however, borrowers are being lulled into a false sense of security: the pain of rising interest rates, when it comes, will only be temporarily delayed.

The other development is that almost all home loans are now capital repayment mortgages. Just 1pc of first-time buyers took out an interest-only mortgage in the second quarter, and the proportion of existing homeowners doing so fell from 8pc to 7pc, a record low. A quarter of a century ago, 75pc of mortgages were interest only. The reversal has been extreme. There are advantages to this: the total stock of debt is rising much less quickly.

But there are also disadvantages: there will nowhere to hide, no possible Plan B to buy time when interest rates start to go up.

The UK economy is booming, which is great news. But will it continue to motor ahead when the cost of money finally starts to rise?

It is hard to be overly optimistic.'

Just to add another to the recent run of bearish articles.

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This is all part of the plan.

The transfer of income from the Middle and Working Classes to the Elites is in full swing.

Soon we will see IR rise which will achieve a huge transfer of property wealth.

Endgame will be the slashing and burning of pensions - the Elites won't care about votes by this point in time.

Welcome to the Globalised Feudal economy!

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No mention of the PPI-fueled rocket of PCP deals which are boosting new car sales.

http://www.motortrader.com/automotive-news/point-sale-dealer-finance-sales-15-year/

Not sure how this view stacks up, seems that these PCP deals are just sustainable purchases from people who would otherwise have bought new in a different manner. I must say I find this a bit difficult to believe.

http://www.motortrader.com/automotive-news/cap-dismisses-pcp-oversupply-fears-used-cars/

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No mention of the PPI-fueled rocket of PCP deals which are boosting new car sales.

http://www.motortrader.com/automotive-news/point-sale-dealer-finance-sales-15-year/

Not sure how this view stacks up, seems that these PCP deals are just sustainable purchases from people who would otherwise have bought new in a different manner. I must say I find this a bit difficult to believe.

http://www.motortrader.com/automotive-news/cap-dismisses-pcp-oversupply-fears-used-cars/

Of course, new car buyers are all wealthy individuals just using market arbitrage in their favour.

Just like all these people with interest only loans from 2003 - 2008 on their homes.

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That’s what people on here have been saying for many years but the street this can is being kicked down seems never ending…

"Can-Kicking street"

A new documentary from Channel 4 on the greed, stupidity and parasitic self-interest of the residents of a fashionable address in SW1.

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No mention of the PPI-fueled rocket of PCP deals which are boosting new car sales.

http://www.motortrader.com/automotive-news/point-sale-dealer-finance-sales-15-year/

Not sure how this view stacks up, seems that these PCP deals are just sustainable purchases from people who would otherwise have bought new in a different manner. I must say I find this a bit difficult to believe.

http://www.motortrader.com/automotive-news/cap-dismisses-pcp-oversupply-fears-used-cars/

PCP isn't really a purchase as you're just covering the depreciation.After four years,you have the balloon payment to buy the car or enter a new agreement.

When you buy a car on HP,then after 4/5 years,you own the car.

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Lulled. Nice experiment to save the victims of overvalued assets and in overpaid bubble jobs, but party time is ending. MMR for one thing, and taper for another.

Rising debt levels create economic feedback that forces a deflationary reaction. Put simply, debt cannot compound faster than income. Stand clear for hpc.

There is a particularly firm conviction among business economists that feeding reserves into the banking system at an artificially low price will assure a pick-up in nominal growth, with a variable lag of about eighteen months.

We doubt this for several reasons. Nominal interest rates in the banking system cannot fall below zero. Banks cannot pay people to take money away. Furthermore, people who borrow money must be able to retire their debt. This limits the willingness of creditors to lend and of borrowers to use the available reserves to create loans. At interest rates above zero, investment generated by new debt must produce a rise in income higher than the interest rate, and sufficient to amortize the principal. Otherwise, any additional debt is contractionary.

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MMR for one thing, and taper for another.

MMR is a damp squib, multiple topics/posts on here exposing how little teeth it has. Also, since the start of the taper both US and UK 10 year yields have come in by 60 bps. Also the move in gilts has come at a time when pound gets more and more overvalued ever day, the governor talks of a Q4 rate rise and UK macro data positively surprised for the first 5 months of the year.

Whats causing the fractures in the housing market now are high prices and lack of affordability, plain and simple.

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MMR is a damp squib, multiple topics/posts on here exposing how little teeth it has. Also, since the start of the taper both US and UK 10 year yields have come in by 60 bps. Also the move in gilts has come at a time when pound gets more and more overvalued ever day, the governor talks of a Q4 rate rise and UK macro data positively surprised for the first 5 months of the year.

Whats causing the fractures in the housing market now are high prices and lack of affordability, plain and simple.

Not so sure that's true about MMR when I read MSE Mortgage forum, and posters, hoping to pass after compelting long interview, and banks being really picky about small points. Perhaps more so your way for those with chunky deposit.... last of the 'quality buyers' being sucked in at high prices.

The rise of the pound might be markets trying to force a deflationary reaction, rather than taken with impressive growth outlook - a private theory. http://www.telegraph.co.uk/finance/newsbysector/industry/engineering/11007789/How-a-strong-pound-played-havoc-with-British-exports.html

Perhaps the 10 years have come in, on the taper, against now even more signiciantly overvalued asset values and high risk almost everywhere else, after this latest round (few years) of yield chasing/reflation. Imo.

Agree with you about the last part, signs of fractures on high prices and lack of affordability despite teaser rates... which is after all, positive for hpc outlook, even if you don't accept MMR and other stuff having much affect. Market has already brought in so many buyers at ever higher prices. I can hear the sound of a barrel bottom being scraped now.

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MMR is a damp squib, multiple topics/posts on here exposing how little teeth it has.

You may be correct. Upto lenders, and of course, borrowers/buyers make their own decisions. Not that it helps the excuse-givers seem to find reasons about victimhood for any spending/debt excess, when it's at risk of going bad, or actually turns bad. "They didn't know what they were doing." "They just wanted a home."

Anyone want to join me? Awaiting Mortgage decision...

Page 114 & 115 http://forums.moneysavingexpert.com/showthread.php?t=4711931&page=114

jojo_1982

11-08-2014, 3:09 PM

Just had L&C contact me saying that Nationwide are asking where July's rent is from our tenants. :(

They paid it 3 weeks late so it still isn't showing in our accounts yet. I'm now really stressing that this will affect us getting the mortgage offer. In which case to say I'll be annoyed with the tenants is a huge understatement.

jojo_1982

11-08-2014, 6:32 PM

Yes, we have a BTL property that we used to live in (if we sold it we would have a couple of grand left after paying off the mortgage and fees so we're better off renting it out - as long as people pay the rent!), and we moved so are trying to buy somewhere down South now.

On our bank statements, Nationwide are specifically looking for credit from the letting agents we deal with so I'm not sure how this would help.

Get ready down South to see another buyer outbid you. Perhaps Wonderpup can claim the buyer couldn't see much risk, and if it goes wrong, shouldn't have had any expectation of finding themselves in a foodbank within weeks of any tenants' default or void period, or other change to main income. People are not supposed to assess the future/risks as they outbid, rack up debt on top things, and put little away in savings. #Save the victims. Renting is dead money.

Linear expectations in a nonlinear world.

There is much evidence that human expectations tend to be linear. Most of the time, most people expect current conditions to continue for the indefinate future. It is almost an unnatural act for a man to leave home with an umbrella on a sunny day. Call it optimism, faith in the future, or just reluctance to see the party end, there is a presumption that the environment is stable. This is why cities are build on floodplains and fault lines. A similar presumption makes the gambler double his bet or the farmer plant additional crops on reclaimed land the year after a good harvest.

Wherever prosperity exists, it is natural for people to expect prosperity to continue. For this reason, much of the history of human society is a record of astonishment. Time and again, people have marginalized their affairs, rendering themselves increasingly crisis-prone. They have gone into debt, extending claims on resources to an extreme that could be supported only if current conditions were sustained uninterrupted into the future. Time and again these hopes have been disappointed.

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Urghh. Their homebuyers report, has valued the place down South they want to buy, less than he/she offered to pay seller.... on their accepted offer with the seller. Remembering the MSE guy the other day who was proud of buying at £215K (was on at £225K) two years ago, but having spent a wad updating it, is outraged the lender has valued it at £200K, as they looked for a new mortgage rate fix. Was looking whether he had a case against the original valuer when he bought it. ("You're the one who agreed to pay £215k for the house - maybe you should take it up with yourself?"). What a market, eh, weight on your back.

jojo_1982
Yesterday, 11:39 AM

So we have our homebuyers report back. It values the house at 30k less than the accepted offer. Nationwide haven’t said how much they would be willing to lend based on this, and I’m not sure what their valuation suggested it was worth and if this matches the homebuyers report but I doubt they will lend us that amount. Also, I’m not sure we can afford to pay that anyway as it would take every penny we have and there are several things considered on the report as a safety hazard needing immediate work, and we wouldn’t have the money to fix these.

Does anyone know who I get in touch with now? The estate agents was my first thought.

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Urghh. Their homebuyers report, has valued the place down South they want to buy, less than he/she offered to pay seller.... on their accepted offer with the seller. Remembering the MSE guy the other day who was proud of buying at £215K (was on at £225K) two years ago, but having spent a wad updating it, is outraged the lender has valued it at £200K, as they looked for a new mortgage rate fix. Was looking whether he had a case against the original valuer when he bought it. ("You're the one who agreed to pay £215k for the house - maybe you should take it up with yourself?"). What a market, eh, weight on your back.

Some choice quotes on BTL on that thread in MSE:

Will keep letting out the BTL they used to live in as they'd no make any money if they sold it. Will be ok as long as the tenants keep paying (with a telling exclamation mark at the end) = 'we've had voids and selling would kill us'.

Also a note about how MMR means the mortgage bank is checking their bank statements for letting agent credits - presumably they've been hiding the BTL during the mortgage process...............

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I think they were open about the fact they had a BTL, bearwithasorehead. The lender wanted to know where the last month's payment was from the letting agent..... their tenant hadn't paid it on time. Landlord angry with his tenant, because he wants to borrow more money for another home. Standard stuff... sort of victim many hpcers feel is totally blameless. Surprising thing was bank even giving him time of day to put in an application. And a few voids on his BTL, perhaps another victim we have to protect from repo. And why of course, Bank rate can't go up.

At some point, central banks, led by the Bank of England and the Federal Reserve, will start tightening monetary policy in earnest, and this is bound to eventually have a knock-on effect on the cost of consumer borrowing.

That’s what people on here have been saying for many years but the street this can is being kicked down seems never ending…

Yes.

And signals so confusing. Sort of feels we're heading towards point where things will be made clearer. Whether it's to be continued and deeper support of the VI, as $trillions past few years, continuing, with even more HPI and stockmarkets flying higher... with more stimulus to support ponzi prices, with a faster move, or prolonged, continued wiping out of saver-renters, younger generations. Or tighter money, and some market forces to be unleashed.

Radio show yesterday = Wage inflation best way to proceed rather than letting houses fall back in value. (err what about my years of saving from way back against runaway HPI, and victim debtors outbidding me).

Aggregate demand would come back, if more people could afford things like houses, without HTB, and less fearful Bank rates going to rise, even a little, from emergency lows.

Fed vs ECB

http://www.bloomberg.com/news/2014-08-24/why-wall-street-can-t-get-any-respect-from-bond-market.html

https://www.bloomberg.com/news/2014-08-24/draghi-pushes-ecb-closer-to-qe-as-deflation-risks-rise.html

http://www.telegraph.co.uk/finance/economics/11054890/Eurozone-opens-doors-to-QE-as-Germany-and-France-stumble.html

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