Thursday, March 4, 2010

The view on the UK from the outside

Britain Grapples With Debt of Greek Proportions

“In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent” the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product. a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels. That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation. British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States.

Posted by ontheotherhand @ 11:04 AM (3335 views)
Please complete the required fields.



46 thoughts on “The view on the UK from the outside

  • This is Gordans miracle economy. Keep borrowing until we go bust. One day someone may be held responsible for this mess (all based on HPI).

    Reply
    Please complete the required fields.



  • There will be another article which says “Nah, it ain’t that bad in Britain, go out and buy a house”

    …and so the propaganda war continues.

    My advice – do your own figuring.

    Reply
    Please complete the required fields.



  • matt_the_hat says:

    You won’t see a headline like this in the british ‘free’ press

    Reply
    Please complete the required fields.



  • W T F

    Can someone explain these figures to me.

    In this headline they say the average deficit in Europe is 6% of GDP but in UK it’s 12% of GDP and then go on to use a debt figure of 380% of GDP (but don’t make it clear if that refers to Japan with the highest or UK in 2nd place).

    Then the article a few below this shows Investors Chronicle quoting :-
    The OECD estimates that the UK government’s gross financial liabilities are 83.1 per cent of GDP.

    How can all these figures vary sooooo much ?????

    This is a job for Flashman to explain.

    Reply
    Please complete the required fields.



  • ontheotherhand says:

    The 380% is private and public sector debt combined and was calculated by McKinsey. You can see the chart in Exhibit 1 on page 10 of http://www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/debt_and_deleveraging_full_report.pdf Perhaps someone with the knowhow can paste the chart in a comment?

    Reply
    Please complete the required fields.



  • ontheotherhand

    Cheers, there still seems to be quite a bit of variation on which figures are getting quoted and their relevance.

    This from the article :-

    (“This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.”)

    Reply
    Please complete the required fields.



  • str 2007 said, “W T F”
    – They vary so much because they are counting different things 🙂
    * Deficit of 12% is amount being spent – amount being taken as a % of GDP and may or may not include interest payments on debt.
    * Debt of 380% is total debt of country, public + private as a % of GDP.
    * Government liabilities of 83.1% is the public debt as a % of GDP.

    Reply
    Please complete the required fields.




  • “And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey.”
    – This mean Britain’s debt is 380% of GDP, second to Japan.

    ( think you need some coffee str )

    Reply
    Please complete the required fields.



  • image hosted by ImageShack

    Reply
    Please complete the required fields.



  • str 2007: Debt is a very complicated subject and it can be expressed in many different ways. Unfortunately we are in the incapable hands of journalists who selectively quote the numbers out of context, depending on what they think their audience wants to hear.

    Fortunately all that matters is the bond markets because these are the people who hold the debt and lend us the money. They consider the following three things above all else. Hopefully it will put a little perspective on our debt position

    1. The most important debt ratio is arguably the debt to GDP ratio. The current bad boy Greece will probably get to about 125% this year whereas ours is expected to hit about 55%. Not only is ours less that half the Greek figure but we have the massive advantage of controlling our own currency. We can make adjustments while the Greeks are doomed to have a currency that makes their position worse. Their GDP is forecast to shrink making this important ratio even worse. Our GDP is forecast to grow (by the bond market and OECD etc) making our ratio potentially better. With debt it is always vital that the market thinks it might get better. If they think this, then the interest rates demanded stay low
    2. Debt maturity: Our national debt has maturity dates that are much longer than almost any other country. This is massively important because we do not need to pay it back while we are in a pickle. Almost everyone else does. This means that we can afford to stimulate our economy while Greece etc have to impose austerity measures. Put simply the bond market thinks Greece will shrink and we will grow. That is why they don’t baulk at lending us the money. Why would you lend to a country that is destined to be smaller and less able to pay in the future (except at punitive rates)?
    3. Assets: Most debt numbers do not properly take into account assets (particularly liquid). The UK public, private and consumer sectors have more assets when compared to their debts that most countries. Believe it or not the Maastricht treaty is partly responsible for this reporting anomaly of the government debt figures

    Reply
    Please complete the required fields.



  • mountain goat says:

    Seems to me that last year’s 12% deficit, a slow recovery, a Keynesian-on-steroids Central Bank, un-pricked housing bubble and the prospect of a hung parliament make us a Soros-style-speculator’s dream come true. The next few months should be a roller-coaster.

    Reply
    Please complete the required fields.



  • Flashman 9 very neatly puts UK govt debt into perspective. In general there has been too much concern over govt debt and too little over the much larger private debt.

    Reply
    Please complete the required fields.



  • To Flashman’s points I’d add that real interest on the debt is currently pretty low compared with the 70s and 80s (not so long ago when you consider we’ve only just paid off a lot of the long-term gilts issued then). It’s still historically low when you factor in how yields might rise in the near future. Like any debt, the repayment schedule is, broadly speaking, as important as the principal.

    Reply
    Please complete the required fields.



  • Seems to me that last year’s 12% deficit, a slow recovery, a Keynesian-on-steroids Central Bank, un-pricked housing bubble and the prospect of a hung parliament make us a Soros-style-speculator’s dream come true. The next few months should be a roller-coaster.

    After the election I think we will be better placed to really see what’s going to happen.

    Reply
    Please complete the required fields.



  • As to how our longer term gilt yields have changed I found this reference which I found helpful.With us issuing ever more any changes in gilt yields will achieve a greater significance.

    “This is because longer-term interest rates are important too and they are much more rarely discussed.

    Longer-term interest rates and for this I intend to use ten-year government bond yields as an indicator have in general been falling over the past 20 years or so. I remember for example long-term UK government bonds yielding 15% whereas they now yield less than a third of that. This has been a big boost to economic growth over this period. This has meant many types of borrowing have been made cheaper. Particular examples of this are fixed-rate mortgages which have become more common over this period and also corporate borrowing which is often priced in relation to government bond yields. So the economy has had a nice boost from this. Consumers and corporates have been able to borrow more cheaply. How much of the economic growth of the last twenty years has been caused by this is difficult to measure exactly but it has clearly been a factor.

    What is the importance of this?

    The importance of this is that this downward trend is turning. This is part of what has been called the sovereign debt crisis. Now if lower longer-term interest rates benefit economic growth then rising ones will harm it. So if this trend continues and I think it will then our efforts to reduce our debt burden will carry an increasing amount of deadweight in terms on interest costs. These are low at the moment (which generates complacency in many quarters) but the trend is rising now.”

    Reply
    Please complete the required fields.



  • 666

    I kind of realised afetr reading the article taht they were quoting different figures, it is frustrating though that we can clearly compare like with like as a country in a league of others without manipulation.
    Would be interesting to see a monthly or quarterly ‘independent’ report that’s published to show how we’re doing in the grand scheme of things.

    Flashman
    Thanks very much, that’s much clearer. I assume the 55% you talk of is missing something the 83.1% gross financial liabilities the OECD quote.. Is that the public debt by chance (mortgages and credit cards)
    It would be interesting to see these two figures in a table against other countries to see how endebted our population as a ratio of our governemnts debt.
    I’m still a bit confused as there’s the 381% figure as well and people keep phoning me up while I’m trying to get my head around it.

    As 666 says, perhaps I need a coffee.

    Reply
    Please complete the required fields.



  • matt_the_hat says:

    Flashman I always wondered who the muppets were in the city who buy Gilts

    Let me tackle your analysis step by step.

    1. I’m absolutly sure we are above 55% already. The ability to devalue ones currency is not in the interests of creditors who buy the bonds (unless you go buy the alias of the flash).

    2. The existing debt maturatity mabe long but they have to roll over approx 12% of GDP for the next few years so unless the BOE buys the gilts then they have exposure to the bond market.

    3. Assets are only worth something if you have the volume of buyers. So unless there is a buyer for the entire housing stock in the UK then this cannot factor into the equation.

    Please tell me which institution you work for so I can factor this into my investment decisions.

    Reply
    Please complete the required fields.



  • str: the figures I quoted are ‘like for like’ which is really all that matters. There are so many ways of expressing the figures and journalists have a nasty habit of mixing up incompatible methods in their comparisons. I did a quick search for a chart that shows things more clearly. As you will see we are really not that bad. About the same as France but with much better maturity dates. I quickly looked to see if the chart is ‘like for like’ and it does appear to be OK. There is also a half decent article attached which makes the valid point that we are being punished because we rapidly rose to match everyone else from a lower base

    http://news.bbc.co.uk/1/hi/business/8415703.stm

    Reply
    Please complete the required fields.



  • Thanks Flash

    Just on my way out, I’ll have a look at that link later.

    Reply
    Please complete the required fields.



  • mth: Gilts are not bought by “muppets in the city”. They are mostly bought by the worlds largest and most reputable pension funds. If you think you know more than they do, why don’t you send off a few CVs? You are thinking of assets too narrowly (there is more than housing in this world). Assets include oil fields, mines, and an almost infinite number of overseas and domestic, income earning investments and vehicles. In any case, your comment on housing not being worth anything “unless there is a buyer for the entire housing stock in the UK” is a little nonsensical. It is quite a bizarre statement on many levels. Perhaps you want to rephrase? I actually said “make adjustments” not “devalue” the currency. However, Gilt buyers have a more sophisticated though process than you imagine, probably because they are professional Gilt buyers. They might well consider the ability to devalue a currency to be in their interests because sometimes it helps a country to thrive. The UK currency has devalued several times in the past and almost every time it has helped the country come out of a recession. The coupon on gilts allows for these eventualities and Gilt buyers prefer that a country devalues a bit if it helps avoid a default. The episodes where the UK currency has devalued are usually followed by a recovery and the subsequent sharp appreciation of the currency, often before the Gilt matures. Regarding the ratios, you have to look at ‘like for like’ to get any sense out of them. Have a look at the link I sent to str 2007 (again don’t get caught up on the numbers – it’s the comparison that matters)

    Reply
    Please complete the required fields.



  • @18 – “Gilt buyers prefer that a country devalues a bit if it helps avoid a default”

    Another analyst sees devaluation as being tantamount to default.

    I remember seeing (yet another) analyst on Bloomberg saying that Britain is unlikely to ‘default’ because it can just print the money it needs. I can’t see how a country can maintain a ‘AAA’ credit rating this way…sounds too simple. But you(and they) are obviously more expert than I am on this matter.

    Reply
    Please complete the required fields.



  • str 2007: You asked if anything had been removed from our national debt. It hadn’t but I thought it would be interesting to remove the bailout costs. Without bailouts the current total national debt (quite recent) is 49% of GDP. We’ll almost certainly get the bailout money back, so it is a useful figure because long term, it makes our debt more manageable. We spent far more than most on bailouts because our banking sector is so large.

    Our annual budget deficit is about the same as Greece at about 12% (compared to 14% for the Irish). Far more of the total Greek debt is considered to be structural as opposed to cyclical. More of the UK total debt is considered cyclical. This structural versus cyclical consideration is another very important thing to look at rather than just comparing bald figures.

    Reply
    Please complete the required fields.



  • “Another analyst sees devaluation as being tantamount to default”.

    Not at all. Read my comments @ 18 more carefully: “The episodes where the UK currency has devalued are usually followed by a recovery and the subsequent sharp appreciation of the currency, often before the Gilt matures”.

    In other words, the temporary devaluation is not remotely similar to a default and in many past cases the Gilt holders have actually ended up benefiting from an appreciated currency by the time the Gilt matures. There is a negligible chance of the UK defaulting and a negligible chance of the Gilt holders suffering a long-term currency collapse. The coupons reflect this. It is not analyst who make this so. It is hard-nosed Gilt buyers from some of the world’s most respected institutions

    Reply
    Please complete the required fields.



  • Flash – Maybe it’s a matter of degree. Going back to your previous point about the debt/GDP ratio, the Thatcher govts of the 80s saw a sharp decline in that ratio simply because inflation gave a massive boost to nominal GDP while the stock of debt (mainly non-indexed-linked gilts) stayed the same. Gilts generally yielded a negative real rate of return and investors were double-whammied by CG tax on their nominal earnings. So they demanded high yields, which, when inflation subsided, gave them massive real rates of return in the 90s. It’s that kind of see-saw that needs to be avoided.

    Reply
    Please complete the required fields.



  • @21 Flashman, I have only started looking into investing in Government Gilts/Bonds so you need to forgive my ignorance, but if there is one common trait among all investors (myself included) it is that they want to make money for taking risk. I would only invest in Index-linked Government products and even those are skewed by Government inflation calculations, but that aside.

    As far as I’m aware, British Government Gilts are long dated and very few investors (again, I think) would hold them until maturity. The respected investors as you call them, I would imagine, trade them like shares such that their face value and yield would be different to the actual issue price and this reflects the confidence (or lack of) in the Governments ability to repay, hence the term ‘Junk’ rating given to high yield Bonds.

    As far as currency devaluation, I am not talking about measured against a basket of currencies; I am talking about hard core purchasing power. Why would a Gilt investor care about getting all their money back if it only has half the purchasing power? They may as well just get half their money back that they originally invested surely? I must be missing something.

    Reply
    Please complete the required fields.



  • @23 Correction, I should say that the trade price is different to the face value which results is a different yield.

    Reply
    Please complete the required fields.



  • icarus: I’m not just agreeing with you because of your earlier reference! … but yes, we do need to do more to avoid the “see-saw”. It’s kind of difficult though because the world is such a dynamic structure. Countries rise and fall, industries become outdated, commodities get discovered/become scarce and new technologies change the way we do things. On top of that you’ve got speculators probing for fault lines. I often think that the various economic management systems we adopt are only good for the problem that has already gone by. Every crisis seems to put us in new(ish) territory.

    Going back to your Thatcher era example, yes the Gilt holders ended up making out like bandits. There is an actuarial debate about who is the equivalent to the “house” in the game between Gilt buyers and the issuer. Historically the buyers seem to be the “house”. Ultimately they have the power because if you shaft them once, it might take half a century to be forgiven. The multi-century UK record of not defaulting is jealously guarded for that reason. Time for dinner. Cheers

    Reply
    Please complete the required fields.



  • estrader: No problem. Most Gilts are bought by pension funds because the maturity profile matches their long-term actuarial profile (members retiring etc). They don’t tend to trade them because they are mostly bought with the express purpose of holding them to maturity. At different times the pensions funds (and insurance companies) buy different maturity dates to match their future obligations

    As far a confidence in UK Gilts being paid, see my last sentence to icarus @26. There is almost no worry about a UK default. I know it doesn’t often seem like it from some of the more colourful press articles but that is how it is actually seen

    Regarding currency devaluation: It is perceived that there is just as much chance of a currency appreciation and of course the coupon paid makes sure the buyers own the “house” slots.

    I hope that helps

    Reply
    Please complete the required fields.



  • estrader: There is an interesting anecdote that illustrates just how seriously the repayments of Gilts are taken by proper countries…. The communist governments of China and Russia voluntarily paid off ancient defaulted debts from the previous imperialist governments. They did this because it is vital for any government to be seen as a reliable issuer of Gilts. There was absolutely no obligation for them to do this. The UK has the best record of all.

    Another thing. If you are thinking of investing in Gilts… Don’t bother diversifying because unlike other bonds, all Gilts rise and fall in price together. I’d also stay away from Gilts that have a variable coupon. The government might be the “house” on those

    Reply
    Please complete the required fields.



  • Thanks Flashman.

    Reply
    Please complete the required fields.



  • matt_the_hat says:

    reputable pension funds – you tell them you want a decent low risk return with no nominal losses – and you get what you ask for.

    flashman have you heard yourself – buy to maturity – want devaluation – only in the city could someone come out with such bull5hit and charge a fee.

    Sure if I bought 30 year gilts at a coupon of say 4%. Would I make a real return. Inflation will avaerage over 5%. In the last 100 years the dollar has lost something like 99.999 cents of its purchasing power – the pound will be similar. Your talking out of your ar5e with other peoples hard earned money.

    Reply
    Please complete the required fields.



  • All we need now is vacuous politician with :-
    ‘Wolf in sheep’s clothing’ and ‘jar spoon spoon jar’.

    Reply
    Please complete the required fields.



  • matt the hat: I can’t hear myself saying “want devaluation” because I didn’t say it. Do you actually read anyone’s post or do you just get triggered by a few key words?

    I was simply explaining who buys Gilts and why they buy them, in response to a question. I’m sorry if you are enraged by the fact that pension funds and insurance companies buy Gilts. I don’t personally make them do it. I do not sell or buy Gilts and I have no involvement in the pension industry, so I am not “talking out of my arse” with anyones money.

    Your last paragraph is a little garbled but you appear to be claiming that you can predict the inflation rate for the next 30 years and the Pounds value for the next 100 years. Gilt buying departments definitely don’t have anyone with that kind of talent.

    Reply
    Please complete the required fields.



  • Flashman
    The BBC link was good.
    So we’re not in trouble afterall.
    I notice Germany doesn’t show in the debtors list though.

    It does seem incredible to me that all this debt is sustainable.
    You know doubt know the amount of interest we have to pay on all this debt, I heard a figure of £60 billion a year in a few years time, which sounds high to me given the figures being discussed.
    However, what could be done with a tenth of that amount ?

    The numbers are all getting too much for my tiny mind.

    Reply
    Please complete the required fields.



  • tenyearstogetmymoneyback says:

    Interesting how everyone keeps going on about Japan. The big difference is that their consumers aren’t in debt.
    I know it is out of date but have a look at http://www.creditloan.com/blog/2008/10/30/americans-debt-to-income-ratio-as-compared-with-other-countries/

    Basically it seems to show that as fast as the Japenese government spends consumers save (which might be a self feeding circle)
    Compare that with the situation in the U.K. where the spending seems to be done by both consumers (buying fast German Cars etc)
    and the governement (buying fast German police cars etc).

    Reply
    Please complete the required fields.



  • tc: Personal debt may be an HPC sacred cow but it is not as much of a problem as people like to imagine. The vast majority of personal debt in this country in in the form of mortgages. Contrary to popular HPC belief, most people have a comfortable equity cushion and easily manageable mortgage payments. They are happy, secure and unlikely to default. Then there is the real killer of HPC folklore which is the fact that mortgages are actually a form of savings. Every mortgage payment gets the mortgagee nearer to outright ownership. In other words, a large chunk of their monthly payment goes to themselves. What we have is a situation where the blog world rants about a personal debt fiasco that in reality equates to a mass savings scheme. Even if house prices tumbled, most of the the participants in this so called personal debt fiasco will end up owning their house, outright, without a care in the world. As you will see from figures below, house prices would really have to fall to wipe out the average equity cushion. Even if they did, it wouldn’t stop most people paying their mortgages. I’ll say it again; What ‘we’ call personal debt problem is actually people saving for their future security and prosperity. It would be different if the majority of personal debt was in the form of credit cards or car loans but it isn’t.

    The total personal debt in this country is £1,460bn. £1,234bn of this is secured mortgage debt .
    Their are only 11.1 million households who actually have a mortgage and the average equity cushion enjoyed by these households is £52,500. When you consider that only 11.1 million households actually have a mortgage, you can easily see that our private national assets are significantly larger than our private national debt. This is why house prices haven’t tumbled and why the banks are starting to position themselves again for market share. It is also why the UK has an AAA rating with virtually no chance of default

    The ONLY chance of a significant HPC crash is if unemployment really takes off. Debt is a false HPC god

    Reply
    Please complete the required fields.



  • regardless of all of that debt IS a four letter word…. then again so is save!

    Flash – you say (and i agree) that credit contraction (being part of M4). and if not offset is deflationary. Therefore if you have a credit contraction (after they have overcooked it with expansion previously… for example) then thats deflationary for asset classes. I’m not sure what most people on here actually think, but i for one do think that the market is just overcooked, needs to correct and, once it does HPC will be dead and buried, and we will go marching back to the top of the hill and beyond.

    How long that will take is the question. [although i assume some on here would like to think that will never happen, and some bulls think it already has]

    However, debt destruction, and lack of credit availability particular for private enterprise surely cause, or at the very least contribute to, unemployment and/or short time working / cuts in living standards and consumption contraction which multiplies throughout the economy. Now what you seem to be saying is that the majority of debt is secured on housing instead of for consumer durables, but then the question reverts to the employers, the gearing of the companies themselves and their order book. Debt is a red herring – perhaps but only for consumer debt, for example what would happen if the debt were on car loans on credit cards?

    For car loans the HP company come and take the car, for credit cards they do a deal, they don’t take the house [although i believe a few months ago they had a go at this]. But for unemployment (eventually) debt on the property cannot be serviced which means it is repod. In other words for the mortgage debt to have an impact, rates would have to increase (to what degree is only a guess).

    BTL is interesting though because it is a business (thats my assumption – i am not sure how mortgage debt for them is counted) and is normally highly geared. This would mean that the BTL market – at a low yield -is highly susceptible to relatively mall increases in rates. Ok, but does that necessarily mean there will be big falls in BTL properties, which will suck the rest of the market with it? Clearly this could explain the two tier market of inner city flats and houses.

    For BTL they have over-invested in inner city flats, and over-leveraged themselves on declining (through competition) yields. [again this assumes they are late comers and have no cushion]. When we say on here that there is enough supply of buildings i dont think we strata it between the types of supply.

    Morning ramblings im afraid!

    Reply
    Please complete the required fields.



  • …oh and have fun with the Non farm today!

    Reply
    Please complete the required fields.



  • techie: good ramble. Yes if more personal debt was unsecured or in the form of car loan/credit cards, then we would have a problem. Fortunately there’s really not much of it (relative to secured) and the very high interest rates charged on this stuff at the moment makes sure that the banks wont suffer if a healthy dollop of it goes bad in the future. The buggers mostly charge over 20% so it doesn’t take a maths genius to work out that a few years of usurious charges pay for any possible bad debt up front.

    Debt destruction does indeed contribute to unemployment but it is possible that we have already absorbed most of the pain. The banks are starting to consider market share again and it might not be long before credit rises of the mortuary slab .I used to think that the flexibility of our companies and workforce was a campaign myth but it appears to have been true. Unemployment has stubbornly refused to conform to the forecasts and it is possible that after a 1 or 2-year lag, employment will rise again

    The over leveraged BTL’s could well end up suffering especially in a high employment/high interest rate environment but there is always a bunch of prats who suffer even when things are good. I am only here because I am a long time house price campaigner. Maybe I should leave people alone with their myths and slogans but ultimately dodgy info doesn’t do the cause much good. I probably shouldn’t say it here but I think that BTL’ers are ultimately more damaging to the economy that the bankers. We will survive and even profit from the banking fiasco but the BTL’ers are largely responsible for a structural problem (the dearth of ftb’er opportunities and the diversion of capital from production). Of course it’s the government who are ultimately to blame, so it’s hard to blame someone for feeding his or her family within the law.

    As you know, I truly believe that unemployment (or legislation) is the only thing that can really crash house prices. If we get an official unemployment figure of 3.5 million then I wouldn’t be surprised by a 45% HPC. But will unemployment rise much more? I honestly don’t know

    Reply
    Please complete the required fields.



  • tc: Late on in the boom about 32% of mortgages were interest only. However this was a recent and short-lived trend. I believe that about 82% of legacy mortgages are ‘repayment’. The effect of interest only mortgages is therefore quite small and they almost all have a repayment vehicle attached. These repayment vehicles rightly came in for some stick a few years ago but they are better now. Even the crap ones should pay of a decent percentage of the mortgage

    Reply
    Please complete the required fields.



  • techie: I forgot… btl debt is indeed counted in the stats below (under secured).

    Total UK personal debt: £1,460bn.
    Of which, £1,234bn is secured mortgage debt.
    Average equity cushion on secured mortgage debt: £52,500.
    NB: Less than half the households in the UK have a mortgage (which is probably why millions of people can give their children a leg up)

    Reply
    Please complete the required fields.



  • mountain goat says:

    Flashman – great defence of your position. Few points from me.

    Debt and the house price bubble are tightly interwoven. Debt expansion enabled the boom in the first place. So if house prices fall sharply the debt becomes debilitating. If the mortgages are viewed as savings then they are savings lost, unless hp recover by the time the debt is paid off. Banks take a share of the repayments, so hardly a good way to save isn’t it, if the underlying asset isn’t increasing in value?

    Small point, but owning a house outright “without a care in the world” is a view I don’t subscribe to. Repairs, maintenance, immobile.

    I believe you under-estimated Greek’s national debt problems, from comments you made here a few months ago. Perhaps you were blindsided by some of the sneaky deals they made with GS?

    Any chance you are similarly too optimistic about the UK debt? I take your point that the huge increase of late is cyclical and we can potentially get some of it back. If a lot of that was toxic debt I don’t agree with that though. A further hpc also puts our banks and therefore our deficit under renewed pressure.

    Reply
    Please complete the required fields.



  • Flash

    “Debt destruction does indeed contribute to unemployment but it is possible that we have already absorbed most of the pain. !” Point taken, although its possible we have only absorbed some of it.

    “Yes if more personal debt was unsecured or in the form of car loan/credit cards, then we would have a problem.” I was saying that of itself isnt a problem, for HPC, because the House doesnt get involved. It may be a problem for general consumption as the credit card holder can no longer overspend (but i doubt thats significant anyway). So i dont understand what you mean there. Could you enlighten me? Or do you mean it would be a problem for the banks, which would then need to contract there also?

    BTL included in personal debt…. hmmm i wonder if it should be or if there are stats for this group, since as i said its the business of dealing in properties, so , in essence thats the product of a business.

    Reply
    Please complete the required fields.



  • Hi mg: I hope you are enjoying Fatherhood

    If house prices fall it is never a happy time for a mortgage holder. However if they can hang on in with their payments (which the majority always do) then it doesn’t really matter. They will own a house and be free from mortgages and rent. 25 years is a long time and there will probably be several booms and busts along the way but if ultimately an almighty crash reduces the value of a fully owned house then almost all other assets will probably sink in price, so you are just as well off in real terms.

    “Small point, but owning a house outright “without a care in the world” is a view I don’t subscribe to. Repairs, maintenance, immobile”

    Yes, a homeowner still has to pay bills, so it is not all sunflowers and chocolate!

    I’m not sure I underestimated the Greek problems. Their recent bond issue was significantly oversubcribed which tells a story. However to put things in perspective… I think they are doomed to zero or slightly negative growth for at about 10 years and we are doomed to weak growth for about 3 years

    I’m off for a game of tennis now, so enjoy your day

    Reply
    Please complete the required fields.



  • techie: I was only saying that if more of the personal debt was unsecured then we/the banks would have a problem. It was only hypothetical because most of the debt is secured with healthy equity cushion.

    It is only possible to partially separate out the BTL figures because so many BTL’ers do it on the sly without telling their banks. Cheers

    Reply
    Please complete the required fields.



  • @Flashman,

    Thank you for some very interesting points, which are most definitely food for thought!

    Would you happen to know the median amount of equity that mortgage holders have in their homes? Also, is the average of £52,000 of equity, per mortgage holder, based on the current valuations of property? That aside, £52,000 doesn’t seem a massive amount of equity based on the average house price (Is the average around £165,000?), it’s around 30%, more importantly, 30% of a nominal value.

    When you say that the banks are re-poistioning themselves to re-enter the mortgage market next year, are you saying that the wholesale lending markets are starting to function again? I can’t see bank deposits adequately funding lending any time soon, given the levels of personal debt, we surely aren’t saving enough (haven’t the reserve requirements also been raised for the banks?)? Also, Robert Peston on the BBC seemed to be under the impression that the special asset purchases (correct me if I’m wrong, but weren’t these short term loans issued by the BOE to buy up the otherwise worthless CDOs) need to start being repayed by the banks in 2012, which he (Robert Peston) asserted would put them off lending even further in the next few years.

    On a personal note, I have a deep unease about the economic future of the UK, that would seem to be in contrast to what I percieve to be your own sentiment (I apologise if I have perceived incorrectly), in that the markets seemed to want to correct the overall levels asset prices in 2007/2008, and that state intervention is the only thing backstopping this trend in the markets.

    In essence, it would seem the economy needs/wants to move in a new direction (I agree with Mark Wadsworth on this point, in that selling the same houses at ever increasing prices back and forth to each other is no plan at all for long term prosperity, and is most probably starving productive parts of the economy of investment), but continues to be arrested by on-going tinerking with monetary policy (lowering interest rates, and changing the measurement of inflation), and a wall of public money, in favour of the status quo.

    I have a strong memory of the 1970s when government efforts to maintain the post war consensus began to fail (effectively 30 years worth of government intervention trying to buck the markets), causing ever increasing problems and crises, until the inexorable correction in the early 1980s, that caused a great deal of economic pain. The events of the last few years would seem to be history repeating itself, just this time with much larger numbers, and a new label “Credit Crunch” rather than “In Place Of Strife”.

    Thanks in advance for any replies.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>