economonkey

We’ve all read the stories about rising house repossessions, as the people who over-stretched themselves to claw their way onto the property ladder ‘at any cost’ during the boom years suddenly realise that borrowing all that money to buy a property at a wildly inflated price probably wasn’t such a good idea after all. And it should come as no surprise to learn that around one in thirteen of repossessions over the past three months have involved Northern Rock customers, because the company’s ’strategy’ over the past decade has largely been based on lending huge sums of money to people without asking too many questions about whether they were able to pay it back. The Americans call this ’sub-prime’ lending but we don’t, mostly because the government/banking industry is still trying to claim that we don’t have a sub-prime problem in the UK and the best way to do that is to pretend that the whole sub-prime thing simply doesn’t exist on this side of the Atlantic.

Since Northern Rock is now essentially owned by the British taxpayer, it’s us who are going to foot the bill for this disaster. As well as the PR nightmare that comes from a government owned bank turfing unfortunate families out of their homes, we also have to face the fact that the properties being repossessed (in our name) are largely going to be worth considerably less than the value of the mortgage, in the current market they’re going to be very difficult to sell quickly, and they’re depreciating at around 1% per month. Remember - this is your money the government is burning. Both Northern Rock and the people it lent money to made some remarkably stupid decisions, and they’re all being baled out with public funds.

If the Liberal Democrats have their way, even more public money will be spent on keeping the property bubble inflated and baling out the stupid and greedy. The party’s Treasury spokesman has announced an interesting selection of policy ideas designed to stop the “downward spiral” in the housing market, such as allowing struggling homeowners to sell equity in their property to local authorities and paying rent on that portion of the property. This means that taxpayers money will be used to buy worthless assets (what good is 10% of a house to anybody?) and rescue people who’ve made poor financial decisions. Call us heartless, but we think the best way out of this mess is to let the downward spiral continue so that the market naturally corrects itself and everybody learns to be a bit more sensible when it comes to mortgages.

The Guardian has a fairly good summary of the findings of Sir James Crosby’s report into the UK housing market. Although this preliminary report does not make specific recommendations, it does talk about the kind of options which are available to the government if it wants to get the housing market moving again. Most of these revolve around various schemes to encourage banks to start lending more freely to each other and to invest in mortgage backed securities again - although as Crosby points out, any such measures might not be very effective in the short term.

It’s encouraging to note that Crosby does seem to advise caution when considering any kind of government intervention in the property market, since this could just make things worse and prolong the pain. He says “Even less desirable, however, would be interventions that distorted these markets and prolonged any recovery process. The costs of action need to be set against those of inaction.”

To us, this sounds an awful lot like “Just leave it the hell alone - it’ll all sort itself out in the end”  which would be the best advice on the UK property market we’ve heard in a long time.

According to the most recent figures from the Land Registry’s House Price Index, the average price of a house in the UK fell by 1% in June, leaving current prices just 0.1% higher than they were 12 months ago. At this rate of decline it seems certain that next month will see house prices showing year on year falls. The current price of an average house in the UK now stands at £180,781 - still far out of reach of somebody earning an average salary, which stands at £23,764 before tax according to the Offiec of National Statistics.

Even a couple who were both earning the national average would still need to stretch themselves far beyond the traditional ‘three times your salary’ borrowing ratio to cover a mortgage of that size (and that’s assuming anybody would actually give them a mortgage in the first place).

The figures come at the same time as a report from housing association umberella group, the National Housing Federation, which claims that house price growth will pick up again in 2010 and by 2013 the average price of a house will have increased by 25% to £274,700. This sounds a little implausible to us - even taking recent falls into account, houses are still wildly unnafordable for most workers in the UK, it’s hard to see how anybody is going to afford them if they’re 25% more expensive, especially since the days of easy credit and high loan-to-value ratios are long, long gone and not coming back any time soon. Unless the average UK salary double over the next five years, there’s simply no way the market is going support those kind of price increases.

The report was put together by independent research outfit, Oxford Economics, so it carries some weight. But as we’ve said before, the professional financial experts have been wrong so many times before, it’s difficult to take their predictions with anything other than a big pinch of salt. In January this year Oxford Economics forcasted that average UK house prices would exceed £300,000 by 2010…

As each week goes by and each new set of economic statistics hits the headlines, it increasingly looks like the UK is doomed to slide into another recession. The Independent reports that the British economy saw just 0.2 percent growth in the second quarter of 2008 and the financial services sector, which accounts for over a quarter of the UK’s revenues, grew by only 0.1% over the same period.

As the article points out, the best we can realistically hope for from the next year or two is a stagnant economy, but even that looks somewhat optimistic. How bad is it going to get? Who knows? For every pundit telling us that things won’t be too rough, there’s another saying that the siutation is dire and we’re on the brink of the worst financial crisis since the Great Depression.

The one thing we’ve learned from following these issues over the past couple of years, it’s that the experts who are routinely wheeled out to comment in the media are no better at predicting how things are going to play out than any well informed casual observer.

In case you didn’t already know this, the first £35,000 of savings you deposit in a bank or building society are guaranteed by the government in the event of that institution collapsing. Judging by the mass panic amongst Northern Rock customers last year, it seems likely that most people aren’t aware of this safety net. But the point is that safety net has been in place for a long time, which, if you ask us, makes it clear that today’s announcement that the government plans to guarantee savings to the tune of £50,000 a bit of a non-story.

For a start, it’s not really committing itself to a much bigger bailout than it had already allowed for, and secondly we already know that the government will always bend over backwards as far as it needs to in order to prevent a major financial institution from going out of business. Too big to fail, and all that nonsense.

The real news here is that the banks won’t be expected to make any sort of contribution to this scheme. OK, you can’t argue with the importance of securing the deposits of innocent savers (unless you believe in some sort of extreme-free-market ideology in which even simple cash savings carry an element of risk, which would make for an interesting discussion) but it does seem like once again the financial industry is being given a free insurance policy at the expense of the tax payer.
Keep partying boys, we’ll pick up the tab…

People in the UK are saving the lowest amount of money in almost fifty years, according to research from the Office of National Statistics. In the first three months of 2008 Britons saved just 1.1% of their income, compared to 3% in the winter of 2007 and 6% in the summer of 2006.  The last time people were saving this little was in 1959. Given recent increases in the cost of living, it’s hardly surprising that everybody is feeling the pinch and finding it harder to put money away for their future. With the economy looking likely to continue tanking for a long time to come, you have to wonder how people are going to cope if they’re already struggling to put aside a significant amount of money from their earnings.

If you think times are looking a little tough now, you ain’t seen nothing yet…

The big news today is, of course, that mortgage lending has dropped so far through the floor that it’ll soon be burrowing its way to the centre of the earth. No surprises there, houses are still far too expensive for most people and even if you were brave enough to clamber onto the property ladder at the moment, the chances of you being able to find a decent mortgage deal are becoming slimmer by the day.

But that’s not all - the average two year fixed rate mortgage now stands at over 7%, the highest level in over ten years. It just keeps getting uglier and uglier out there. Six months ago the idea of a massive crash in property values seemed absolutely unthinkable, and now it’s difficult to see how this can end any other way.

In my previous article I described the remit and practical activities of the Bank of England, as they relate to the operation of the UK economy. Now it’s the turn of the Treasury (or HM Treasury, to be accurate), which is the part of the government that looks after the UK’s money - most of it raised through taxes - and, to a large extent, decides how and where it should be spent.

The first fallacy to blow out of the water here is the idea that taxes collected in a particular sector are also spent in that sector. For example, it would be nice if road tax revenue was spent on improving the transport system, wouldn’t it? Or if levies on the oil industry were used to promote renewable energy sources.

Well, they aren’t. Such so-called ‘hypothecation’ of taxes would be complex to administer, though arguably it would help people feel that their hard-earned cash was being used for something practical rather than, say, lining the pockets of MPs who fancy a second house in London. For example.

Instead, all revenue collected by the government goes into a large pot which is then doled out in accordance with plans drawn up by the Chancellor of the Exchequer (currently old badger-brows, Alistair Darling, and previously Gordon ‘Prudence’ Brown).

Obviously the budget is the main public event where such divisions of the swag are made, but in fact the allocation of money goes on throughout the year. There are hundreds of government departments and agencies, not to mention Quangos (quasi-autonomous non-government organisations), local councils and so on and so forth, all of them requiring funding to a greater or lesser extent from the Treasury’s coffers.

You can think of HM Treasury as being like the finance department of a large corporation, where the Chancellor’s role is one of Finance Director. Each of the organisation’s various departments will put in a request for money and the Chancellor/FD then decides - with input from others - who gets what, while trying to make sure that the books are balanced at the end of the financial year.

However, there’s more to the Treasury’s role than simply collecting and dividing up the loot. In fact HM Treasury has numerous declared aims and objectives, as follows [with my comments in square brackets afterwards]:

1. Demonstrate by 2008 progress on the Government’s long-term objective of raising the trend rate of growth over the economic cycle by at least meeting the Budget 2004 projection.

[That seems rather unlikely to be achieved, given that the growth rate trend is now heading downwards by most accounts; and inflation doesn’t count as growth.]

2. Inflation to be kept at the target as specified in the remit sent by the Chancellor of the Exchequer to the Governor of the Bank of England (currently 2% as measured by the 12-month increase in the Consumer Prices Index).

[Failed, though this goal is shared with the Bank of England. CPI has been above 2% for most of the last year or more, and Mervyn King, Governor of the Bank, believes it could reach 4% this year. The inflationary cat isn’t quite out of the bag yet, but it’s spitting furiously and its claws are being sharpened.]

3. Over the economic cycle, maintain:
public sector net debt below 40% of GDP; and
the current budget in balance or surplus.

[This rather depends on how you calculate public sector net debt - i.e. if you include PFI, Northern Rock’s liabilities, etc. - but even with less inclusive accounting, the picture isn’t a rosy one.]

4. Demonstrate further progress by 2008 on the Government’s long-term objective of raising the rate of UK productivity growth over the economic cycle, improving competitiveness and narrowing the gap with our major industrial competitors. Joint with the Department of Trade and Industry.

[It was looking good for a while, but perhaps unsurprisingly, an economy based on financial services and selling ever-more-expensive houses to each other is failing to worry the economic power-houses of Germany, China, Russia and others.]

5. As part of the wider objective of full employment in every region, over the three years to spring 2008, and taking account of the economic cycle, demonstrate progress on increasing the employment rate. Joint with the Department for Work and Pensions.

[This, again, is a tricky one to measure. How do you count part-time work, or people out of work but not claiming benefit, or people on disability benefits? The official picture has been pretty good until recently, but most observers believe that unemployment is now rising, and will continue to do so for several years to come.]

6. Make sustainable improvements in the economic performance of all English regions by 2008, and over the long term reduce the persistent gap in growth rates between the regions, demonstrating progress by 2006. Joint with the Office of the Deputy Prime Minister and the Department of Trade and Industry.

[I’ve found it hard to prove or disprove progress on this point. Anecdotally the North-South divide is still present, but perhaps less wide than it was.]

7. Halve the number of children in relative low-income households between 1998-99 and 2010-11, on the way to eradicating child poverty by 2020. Joint with the Department for Work and Pensions.

[A laudable aim, though one that appears tricky to meet. To be fair to the Treasury, though, we’re talking about ‘relative’ poverty rather than actual poverty. In other words, this is about narrowing the gap between rich and poor (oops, failed again), but if the rich get much richer and the gap only widens a little, that still means actual child poverty has reduced.]

8. Promote increased global prosperity and social justice by [amongst other methods] demonstrating progress towards the Lisbon Goals by 2008.

[Again a laudable goal, but the less said about the Lisbon Treaty the better.]

9. Improve public services by working with departments to help them meet their:
PSA targets, joint with the Cabinet Office; and
efficiency targets amounting to £20 billion a year by 2007-08, consistently with the fiscal rules.

[From the outside, government departments can appear to be a huge waste of money. From the inside, that’s sometimes true, but there are some efficiently-run departments too. Public perception would appear to favour a wide-spread cull of middle-management consultants to improve cost-efficiency. The NHS is by far the most visible PR failure here.]

10. Deliver a further £3 billion saving by 2007-08 in central government civil procurement, through improvements in the success rate of programmes and projects and through other commercial initiatives.

[This might have been achievable were it not for the dramatic and costly failures of large government IT projects.]

So, with all that in mind, is the Treasury doing a good job? If you believe its own somewhat high forecasts for UK growth over the next year, it appears so. However, the disgraces - real or imagined - of PFI, the collapse of Northern Rock and the ongoing fragility of the banking system, the profligacy of some government departments and the increasing gap between the super-rich and the rest of us are all concerns that can be laid, even if only in part, at the door of the Treasury.

In conclusion: must try harder.

Copyright Alex Cruickshank 2008

The author wouldn’t want Alistair Darling’s job for love nor money.

It should come as absolutely no surprise to anybody that the Alternative Investment Management Association, which represents those financial sector cowboys otherwise known as Hedge Funds, doesn’t like the FSA’s new rules which will force them to disclose significant short-selling positions. Hedge Funds tend to make a lot of money from betting that a company’s share price will fall, and the FSA thinks this is having an adverse affect on companies which need to offer rights issues to raise cash (something lots of banks are currently doing to survive the credit crunch.

The FSA claims these new rules are designed to combat market abuse – a handy catch all term, because in today’s ‘anything goes’ financial markets, it’s practically impossible to tell what counts as a fair and honourable transaction and what counts as sneaky, underhand market abuse.

Either way, once again the City of London earns it’s well deserved reputation as a snivelling hypocrite which insists that the government should leave it alone to get along with its business, except when things go tits-up and a hefty bailout at the taxpayers expense is required.

It’s funny that after a decade of cheap credit, low interest rates and out of control house prices, it’s only now that people are starting to worry about inflation. Nobody seems to mind that it’s prohibitively expensive to buy a home, or even rent one, but as soon as the cost of a litre of petrol starts to creep up and a loaf of bread costs a few pence more, all of a sudden the people of Britain are up in arms. Where was all this righteous fury when an entire generation was being robbed of the opportunity to own a home at a fair price?

In any case, if you think inflation of 3 or 4% is bad, you ain’t seen nothing yet. The measure of inflation used to arrive at these numbers is the badly flawed Consumer Prices Index (CPI - which is explained in an earlier economonkey article here). Think honestly about how much the cost of your food and fuel bills have risen in recent years, and ask yourself if it’s really just a few percent? According to the Telegraph, which has taken a stab at producing an alternative index, the real cost of living has risen by almost 10% in the past year alone - but we suspect that’s still probably a bit optimistic.

Inflation - it was a hoot when the value of your property was shooting up by 10% a year, but not so much now that it’s starting to hit you in the pocket…