Wednesday, January 4, 2012

The slippery slope to bankruptcy

One million people take out emergency loans to pay mortgage

What will this do for house prices if their repayments have an APR of 4000%+ ?

Posted by vinrouge @ 07:21 AM (3586 views)
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24 thoughts on “The slippery slope to bankruptcy

  • Lies, damned lies, and statistics. The fact that one million people resorted to payday loans with 1700%+ APRs but then didn’t go bankrupt or get repossessed implies that they were able to repay the debt swiftly. Also we don’t know whether that one million is higher than normal. For all we know (from this article at least), it may have been two million the year before.

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  • drewster – yes, but the fact that they have to borrow to pay a debt also means they look pretty incapable of paying the original debt quite so easily. It’s like Greece on a bigger scale. They were able to borrow to pay for what they were spending, but now they are borrowing to pay the debt off at a rate of interest that is unsustainable, increasing the amount they owe. If all this is going on with the base rate where it is, I’d say they were in trouble.

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  • mark wadsworth says:

    I’m with Drewster on this one.

    Let’s say, for example, a household’s monthly mortgage repayment might have been £600 a month, and now it’s £400. They are so strapped that they have to take out a £400 payday loan every month, even if they have to pay £100 or £200 interest, they are still no worse off than before.

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  • MW – OK another example, let’s say a household bought with a 100% mortgage sometime within 12 months of peak prices. Their fixed rate costs them £600 a month and ends in a few months. Inflation and a baby in the last couple of years means they now struggle to pay the mortgage in full so borrow £100 a month with one of these loans. I’d say manageable in the short term, screwed shortly after.

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  • mark wadsworth says:

    TT, valid points, but we don’t know the number of loans taken out (because we can’t be bothered to look it up).

    It may indeed be one million people taking out a £400 payday loan at the start of each month to pay the mortgage and racking up £300 in interest every month, oo-er!

    Or it may be one million people who have taken out a £400 payday loan one single time in the past year for a week or two, in which case, so what?

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  • to be fair,I think its quite clear that the uk consumer is struggling and this article points to desperate measures.

    can’t see how on earth 4000% is allowed…many credit card companies also charging 20-35% to customers who have been with them for years while new ones get 0%

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  • MW – agreed, which is why my first point was to agree with drewster. But my last point is also important; how many of these people have 20yrs+ to run on their mortgage, and for how many of those are IR’s likely to stay this low?

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  • Is there any more wood left on the coffin to hammer yet another nail in for UK house prices?

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  • rantnrave – good question. I do find it mildly amusing that between us we manage quite detailed technical analysis of pretty much every financial situation that arises, but none of us has a clue why house prices are so high!

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  • mark wadsworth says:

    TT, my answers are “Don’t know” and “Don’t know”. I mean, let’s say somebody does the numbers and tells us that ten million Britons palced a bet in a betting shop last year – does that mean we are a nation of compulisve gamblers, or does that mean maybe one million compulsives and nine million who placed a single £10 bet on the Grand national, the cup final etc, not really caring whether they won or lost?

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  • MW – I don’t know either, and I have a feeling you could debate the point endlessly. But at a fairly basic level, the fact that so many people are having to borrow money to pay back money they borrowed despite interest rates being their lowest in history is definitely not a sign that these people are about to start moving up the housing ladder.

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  • its fair to say that interest rates are 0.5% BECAUSE things are so bad out there.

    which cannot be construed as good

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  • With continued below inflation [CPI/RPI, take yer pick] pay rises, this is set to get a LOT worse. So whilst we can afford to buy cheap
    TVs made in “communist” China, we’ve f00ked our own economy and ourselves. WW3 coming soon me thinks.

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  • sibley's b'stard child says:

    Based on a sample size of 4000.

    From a psychological point of view would respondents under or overemphasise their indebtedness, I wonder.

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  • I wonder how the experts measure pawning of goods,
    borrowing from relatives,
    loans for a car that are actually a loan for paying a debt elsewhere,
    ..
    the hazy stuff. It’s a tough metric to see how much people with mortgages are struggling to make ends meet.
    I suppose people who pay rent need a metric too because their inability to pay a landlord affects a BTL empire, surely.

    Mike

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  • doom watch,
    12 months ago, VAT was raised from 17.5% to 20%. So each month the CPI/RPI has included that 2.5% rise. When you compare prices in e.g. Oct 2011 vs Oct 2010, 2.5pc points of the increase is caused by VAT. This month, Jan 2012, is the first month in two years* which won’t cover a period when VAT rose. So all things equal, this month’s inflation figures should be closer to 3% rather than 5.5%.

    (* Recall that the year before, VAT rose from 15% to 17.5%.)

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  • mark wadsworth says:

    Drewster: “So each month the CPI/RPI has included that 2.5% rise. When you compare prices in e.g. Oct 2011 vs Oct 2010, 2.5pc points of the increase is caused by VAT.”

    Unusually for me, I disagree. By actually looking at sales figures and gross profits of supermarkets over the last four years, it appears that about two-thirds of any VAT reductions or increases accrue to/are borne by the supplier, so price falls or rises are only one-third of the VAT amount. Further, only half of goods and services are VAT-able.

    Therefore, a £13 billion VAT rise (which is what they pencilled in when it went from 17.5% to 20%) = increase in average price of all goods and services of £4 billion, and total spending on all goods and services is £1,000 billion a year (or whatever huge figure, two-thirds of GDP?) so the impact of a 2.5% VAT increase on inflation is more like 0.4% overall, i.e. the square root of f- all.

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  • cornishtinmine says:

    If there are signs inflation is falling there will be another round of QE which will force it up again – The BoE have no intention to meet their 2% target, they just want to inflate our debt away…

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  • cornishtinmine says:

    … whilst protecting those with debt and assets at the expense of everyone else…

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  • MW,
    Thanks for the correction. I’ll admit I hadn’t looked into the figures (I have less free time than I used to), but I’n sure I’ve seen my explanation in the press. Not sure whether it was opinion/comment or a press release from the BoE or other interested parties.

    What I suspect, and what is being murmured around the internet, is that the BoE has stopped targeting inflation and started targeting NGDP or Nominal GDP. In normal times NGDP should go up by around 5%, of which 2% is inflation and 3% is productivity growth. If productivity growth grinds to a halt, the bank can use QE to bring inflation up to 5%. If productivity booms, the BoE can raise interest rates, thereby cutting inflation, so again NGDP growth remains around 5%. This appears to be what the BoE is doing (see http://en.m.wikipedia.org/wiki/Nominal_income_target ).

    The consequence of this on house prices is left as an exercise for the reader.

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  • mark wadsworth says:

    Drewster: “I’m sure I’ve seen my explanation in the press.”

    Oh sure, so have I. But it so happens that it is a complete lie peddled by the powers that be – if nothing else, they can fob off the 5% nominal inflation by saying “Oh don’t worry, half of that is VAT”. Nonsense! Only about a tenth of it is VAT.

    I’ll bet you a dime to a dollar that price inflation doesn’t fall by from 5.5% to 3% this month, it’ll fall from 5.5% to 5% or thereabouts.

    Your NGDP explanation seems perfectly plausible to me.

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  • There should have been a crash in house prices by now, but there isn’t.

    Indicative of UK government being prepared to put absolutely everything they have into maintaining the status quo; it’s all to do with confidence.

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  • @taffee, yeah i saw plenty of consumers struggling home with large bags of Christmas shopping over the festive season. a woman shopper commented to her friend “i dont know where they get the money from”.

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