Why Uk Consumers Are Running On Empty

[munimula]

There’s also some disturbing news on savings. Mortgage equity withdrawal picked up in the last quarter of 2005, from £8.9bn in the previous quarter to £11.8bn. Many commentators have heralded this as good news for the economy – if people are taking more money out of their houses, they’ll spend more on the high street.

But it’s actually not good news at all. Many people are taking money out of their houses to pay off other debt, like credit card debt – which means they are putting their homes at risk of repossession. And it’s no surprise that homeowners feel the need to return to the housing cash machine for another injection of money – research by Capital Economics reveals that UK consumers are essentially running on empty.

Commentators sometimes take comfort from the perception that, while the UK savings ratio is low by historic standards, it’s still better than in America, where people are spending more than they earn. Unfortunately, says CE, this isn’t the case.

If you adjust for depreciation, as they do in the US, the UK savings ratio is actually closer to zero, not the official level of around 5%. Not only that, but between 1998 and 2004, UK households actually saved less of their income than those in the US.

And with annual house price growth barely beating the annual rate of inflation, people won’t be able to rely on their homes to supplement their incomes for much longer.

Iceland's experience shows what can happen when investors get too complacent and start expecting benign conditions, like declining global interest rates, to continue forever. Unfortunately, UK householders are still woefully underprepared for any nasty shocks on the horizon. With the era of cheap money ending, now is not the time to be piling more debt onto your roof - not if you want to remain under it for the forseeable future.

[munimula]

Many people are taking money out of their houses to pay off other debt

This exact pattern happened in the last crash. A spike of MEW before the impending crash.

It really is history repeating itself.

[BandWagon]

This exact pattern happened in the last crash. A spike of MEW before the impending crash.

It really is history repeating itself.

Any chance of a link?

But yep I agree, now we're just waiting for the credit crunch to hit...

[Tuberider]

This exact pattern happened in the last crash. A spike of MEW before the impending crash.

It really is history repeating itself.

yes please support this statement

[bubbleturbo]

This exact pattern happened in the last crash. A spike of MEW before the impending crash.

It really is history repeating itself.

Perhaps, but what was happening with interest rates at the time?

It would be interesting to see another graph of the base rate over the top of the MEW one.

[munimula]

Any chance of a link?

But yep I agree, now we're just waiting for the credit crunch to hit...

It was analysed in a hardcopy article in MoneyWeek a few months back when MEW increased again for the first time after dipping. This was being painted as a good thing by the media but MoneyWeek had the view that it was anything but good.

Basically their analysis showed that this happened in the late 80's and preceded the crash and their analysis was that it is the sign of the over indebted making a last ditch attempt to get some money out of their houses to supplement the lifestyle they have become accustomed too and to clear other debts.

[smarty]

yes please support this statement

Is this what your looking for

http://www.housepricecrash.co.uk/forum/ind...pe=post&id=2982

[kingofnowhere]

Hi

OK, Money weeks, Weak analysis (Basically the same as looking for patterns in the tea leaves at the bottom of a tea cup)

Here is a graph of house prices QoQ /MEW and interest rates (Yep, I've missed out the middle boring bit before anyone says)

As you can see, despite the fact that MEW and HPI were weak (HPI negative) the Government still increased interest rates. (In fact it was 18months after house prices started to fall did the government start to reduce them)

Therefore against the second pick up in the 90's was against a backgound of Rising rates and falling house prices. Hardly sustainable IMHO as you can't keep drawing against a depreciating asset. Also falling house prices act as dissaving, and so deter people from borrowing against their house, in fact they try to overpay to maintain their equity (Or remove the negative equity if they have it)

The Pick up today is against flat interest rates and rising HPI.

The backgounds are basically totally different.

Edited April 6, 2006 by kingofnowhere

[munimula]

Therefore against the second pick up in the 90's was against a backgound of Rising rates and falling house prices.

The Pick up today is against flat interest rates and rising HPI.

The backgounds are basically totally different.

If the second pick up in the 90's was when IR's were rising we could assume that the increase was a last attempt to get money out of property by those that were very overstretched after a big credit binge even though IRs were rising.

Much the same as today.

[The Masked Tulip]

This is all just frightening. I feel like getting a plane ticket, a ruck-sack and travelling the World for 18 months and then returning to see what has happened to the UK.

The state of MEW is just ridiculous. As a follow on from my car thread yesterday I visited an Audi delaership today, have not walked into one of these for years, and I could not believe the prices listed on the cars. I mean, 5 or 6 years ago you could have bought a house for the price of a car but...

People were buying... People were buying and the sale staff, IMPO, were at best curt to the point of being downright rude. The attitude appeared to be one of "We will deem whether you are worthy or not to buy one of our cars" and I could not help feeling that you had to go on some kind of course to act like that - perhaps it ties in with the advertising slant of recent years?

Anyhow, I can't see how even a couple on normal wages can afford to buy these cars so I assume it is all MEW or all on credit. So whilst I do not doubt the Moneyweek article about people MEWing I do wonder whether it is indeed to pay off credit card debt, etc, or whether there is a significant number of people still splashing out on kitchens, bathrooms, new cars, etc... the High Street sale figures would disagree with this though or maybe, here in Wales, the ripples from the pond of MEW and easy credit are still rippling out?

Btw, have I missed something - what has happened to Iceland? I assume the country and not the frozen food firm?

[kingofnowhere]

or whether there is a significant number of people still splashing out on kitchens, bathrooms,

Hi Tulip

Sorry to be a right pain, but these aren't examples of MEW as the money is being reinvested in the housing stock.

[The Masked Tulip]

So MEW is people taking money out of their houses and buying cars, clothes, holidays?

[munimula]

Btw, have I missed something - what has happened to Iceland? I assume the country and not the frozen food firm?

I only included the MEW relevant part of the mail. This bit preceded the first bit.

The meltdown in Iceland’s economy may have claimed its first casualty on the UK stockmarket.

Shares in budget airline easyJet fell by 9% on Wednesday to 327p as Icelandic investment company FL Group sold its 16.9% stake in the airline.

FL denies that the sale is anything to do with Iceland’s troubles – it just wants to crystallise the excellent return it’s made on its investment. Shares in the airline have risen by 71% in the past 12 months alone.

But even if FL is being upfront about the reason for the sale, easyJet isn’t the only company threatened by Iceland’s troubles. Several other UK share prices are being propped up by the promise of a potential takeover bid from a “Viking raider”. Could easyJet just be the first casualty of the Viking retreat?

Icelandic investment group FL Group denies the sale of its easyJet stake has anything to do with Iceland’s shaky financial health. “The share price had risen threefold...and it became ever more tempting to realise a profit.”

But as Fiona Maharg-Bravo points out on Breakingviews, “it’s hard to ignore the timing of the move – the same day Iceland’s stock market suffered its biggest fall in 13 years, and following a tailspin in the currency.”

The problem isn't with easyJet. The problem is that investors have become worried about the strength of Icelandic banks. Broker Merrill Lynch reckons that the banks have £10.4bn of debt coming due in 2007 - which they may not be able to cover.

One of the reasons that Icelandic groups have been able to buy into so many overseas companies is by borrowing heavily. But if Icelandic banks have to start calling in their loans, or making credit more expensive, the investment companies may have to start selling their holdings to repay them.

Even if that situation doesn't arise, the mere threat that it might could be enough to convince other Icelandic investment groups to lock in their gains, before worried investors drive down share prices.

Other vulnerable companies include Woolworths and French Connection, with Iceland's Baugur owning a large stake in both. Both retailers have been notable casualties of the downturn on the high street. If Baugur decides to offload its stake, their share prices could slide even further.

But Iceland’s not the only island economy facing tough times. The Times reports that corporate profitability in the UK has fallen to its lowest in two and a half years, excluding oil companies and the financial services sector.

Meanwhile, manufacturing activity fell unexpectedly in February, for the first time in four months. Analysts had been hoping for the recent rally in the sector to continue, but it looks like “the pickup in industrial activity may have been a flash in the pan”, as Westpac economist Nick Tuffley put it.

The main reason for the fall was a decline in chemical production as soaring gas prices forced companies to stop production. But the sector took another hit when tyre-maker Goodyear Dunlop said it is ending production at its Wearside factory near Sunderland, with the loss of 585 jobs. The company can no longer compete with low-cost competitors in Eastern Europe and the Far East.

And it’s not just the manufacturing sector. Expansion in the services sector also slowed, after hitting a 22-month high in February.

[The Masked Tulip]

The problem is that investors have become worried about the strength of Icelandic banks.

This is my concern about the UK - what happens if/when investors become worried about UK banks. They said it would never happen in Japan but in the Japanese crash/slump into delfation banks went bankrupt and vast numbers of people lost their savings/pensions.

It is all very well being someone saving cash like mad waiting for a fall in HPs but what happens when the crash is such that you lose your life savings - could such savers be potentially worse off than those who have taken on huge mortgages? I mean, such people could be 'left' in their houses as an attemp to get the economy moving again but those who lose cash might be told "Tough luck!".

[Bear Goggles]

Hi

OK, Money weeks, Weak analysis (Basically the same as looking for patterns in the tea leaves at the bottom of a tea cup)

Here is a graph of house prices QoQ /MEW and interest rates (Yep, I've missed out the middle boring bit before anyone says)

As you can see, despite the fact that MEW and HPI were weak (HPI negative) the Government still increased interest rates. (In fact it was 18months after house prices started to fall did the government start to reduce them)

Therefore against the second pick up in the 90's was against a backgound of Rising rates and falling house prices. Hardly sustainable IMHO as you can't keep drawing against a depreciating asset. Also falling house prices act as dissaving, and so deter people from borrowing against their house, in fact they try to overpay to maintain their equity (Or remove the negative equity if they have it)

The Pick up today is against flat interest rates and rising HPI.

The backgounds are basically totally different.

If you are correct and there is nothing to worry about the current level of MEW then surely our society will be divided into two. Those who can forever rely on rising house prices and MEW to live beyond their earnings and those who have to work for their money againat a backdrop of ever rising asset prices and low interest rates / wage inflation.

It's a really depressing scenario