Posts Tagged ‘Mortgage loan’

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According to a Halifax report, new mortgages are at their cheapest level in 14 years. Mortgages taken out during Q1 accounted for just 27 per cent of borrowers’ net income. In 2007 the ratio was 48 per cent; over the last 30 years the ratio was 36 per cent. Yippee to that.

It is just that…

Remember interest rates are at a record low. They are hardly likely to fall, but they are likely to rise. The Bank of England tries to re-assure us by saying rates are unlikely to go up until 2016. Alas, most new borrowers will not be repaying their mortgage in full between now and 2016. Who knows what rates will be in five years’ time, in ten years’ time or in 20 years’ time? It is anyone’s guess.

Remember that the markets have concluded that rates are rising sooner rather than later. The yield on UK government bonds is now at a two year high. Mortgage costs may rise in their wake.

Above all remember this. Sure, over the last 30 years mortgages on average took a higher proportion of new borrowers’ salary than they do now. But over the last 30 years wage inflation was ever present. Who cares about high borrowing to income ratios when incomes are rising so fast?

It is not like that now. Incomes are no longer rising fast, real incomes are falling. Those who celebrate the low cost of mortgages seem to have forgotten this.

© Investment & Business News 2013

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The threat posed by debt just won’t die down. Last week we reported that the Bank of England’s figures suggest that the UK cannot afford much higher interest rates. New figures from the Resolution Foundation suggest that the situation is even worse than the Bank of England suggested.

“If interest rates rise 1 per cent,” said the Bank of England in its latest Financial Stability Report, “households accounting for 9 per cent of mortgage debt would need to take some kind of action — such as cut essential spending, earn more income (for example, by working longer hours), or change mortgage — in order to afford their debt payments if interest rates rise…If interest rates rise by 2 per cent,” continued the Bank, “ditto, except that that it will be households accounting for 20 per cent of mortgage debt who will be so cursed.”

The Resolution Foundation has also taken a look at the story of the UK’s household debt, and its conclusions are even more disturbing.

Before the crisis of 2008 household debt across much of the developed world was worryingly high. Some countries, such as Denmark, Ireland, the Netherlands and Norway had it worse. Nonetheless with a ratio of household debt to gross house disposable income of 174, it was worryingly high in the UK. The good news is that it has since fallen, and the ratio at the end of 2012 was 146.

Alas, according to estimates from the Office of Budget Responsibility (OBR) it is set to rise again – not by much, for sure, but any rise is worrying. The OBR does in fact project that there will be a household debt to disposable income ratio of 151 by 2017 . To put that in context the ratio was just 112 in the year 2000. In the US, at the end of 2012 the ratio was 106.

According to the Resolution Foundation, at the end of 2012 no less than 3.6 million households were spending more than a quarter of their disposable income on debt repayments. Debt levels, however, are expected to rise as the government attempts to kick life into the UK housing market by encouraging greater mortgage lending.

But in its most recent report the Resolution Foundation looked at households whose debt repayments make up more than half of disposable income, or those in so-called debt peril. Right now, around 2 per cent of all households are in this position. If things carry on the way they are supposed to, and rates rise in line with Bank of England projections and real wages increase in line with projections for GDP, the Resolution Foundation estimates that the percentage number of households in debt peril will rise to just under 3 per cent by 2017. This is similar to the level seen in 2007, in fact.

If rates rise by 2 percentage points more than expected, the foundation estimates that the percentage number of households in debt peril will rise to 4 per cent. If, in addition to this, wages fail to rise with GDP, but rather – as has been the case in recent years – increases in wages continue to be outstripped by inflation the Foundation estimates that the number of households in debt peril will rise to 5 per cent.

Okay, you might say, but if this is the case then the Bank of England may not let interest rates rise. Unfortunately, central banks may have less say over the matter than is generally thought. See: The Great Reset 
There are all sorts of combinations and permutations.

But the points to remember are these: as rates rise in the US, the Bank of England may be forced to either up rates, or let the pound fall. If rates rise, debt levels in the UK will increase. If the pound falls, inflation will pick up, real wages may fall, and once again debt to income may fall.

In short, we may be in big trouble whatever happens.

But just bear this in mind. Debt does not matter if the percentage interest on debt is less than the percentage increase in income. What the UK really needs is for incomes to rise, and for this to happen it needs improving productivity, which comes from more investment.

© Investment & Business News 2013

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There once was a king in Sicily called Dionysus. He had a courtier called Damocles who, in his efforts to flatter his King, told his liege how fortunate he was. To teach the obsequious inferior a lesson, Dionysus offered to swap places. There was a catch, however; above Damocles, sitting on his newly acquired throne, there hovered a sharp sword dangling by a horse’s hair, and arranged that way by Dionysus. The fear that the sword might finally fall, severing poor old Damocles’ arteries, proved too much for the imposter on the throne, who eventually begged his lord to swap back.

That’s the trouble with getting gold and riches; sometimes such ownership comes with a burden that is too high to bear. And that brings us to the subject of the UK housing market, the Bank of England, and a kind of monetary equivalent of a sword, dangling by the fiscal equivalent of a horse’s hair over the UK housing market’s equivalent of its genitalia.

You may have noticed that interest rates are quite low at the moment; lower in fact than a very low lower ground floor, which is good news for those with debts.

Suppose though that rates rise. For those who can easily pay their way that may not matter, but for those who can only just cover the interest on their mortgages out of current income, this may matter rather a lot.

“So what?” You might say.”It is time people started to learn how to manage their own finances. If you can only just afford a mortgage when rates at are at a record low, then you shouldn’t be getting yourself a mortgage at all.” It is just that in the UK, groupthink says ‘house prices always go up’, the wisdom of our elders says ‘always get the biggest possible mortgage you can possibly afford’, and George Osborne, with a wink to the wise, and a scheme he calls Help to Buy, has said: “Look, that horse’s hair that holds up house prices will never break.”

The mix of panic over the prospect of missing out on rising house prices, fear over never being able to jump on the housing ladder, and greed over the prospect of making a fortune via the magic of leverage and the guarantee that house prices always returns a profit, makes a heavy cocktail and one that is hard to resist.

The snag is that it turns out that around 18 per cent of secured loans are to households with less than £200 a month to spare after housing costs and other items of essential expenditure.

“If interest rates rise 1 per cent,” said the Bank of England in its latest Financial Stability Report, “households accounting for 9 per cent of mortgage debt would need to take some kind of action — such as cut essential spending, earn more income (for example, by working longer hours), or change mortgage — in order to afford their debt payments if interest rates rise.”

“If interest rates rise by 2 per cent,” suggested the bank, ditto, except that that it will be households accounting for 20 per cent of mortgage debt who will be so cursed.

Again, you might say: “So what? Get another job, worker longer hours, get on your bike.” But when there is unemployment, it is not so easy. Besides if we suddenly see a rush of people, accounting for 20 per cent of mortgage debt, suddenly asking for overtime, there probably won’t be enough to go around.

And that, as they say, is why a certain sword, not unlike the one Dionysus had arranged, dangles by a horse’s hair over the UK housing market.

But this story has another edge to it. “A study by the FSA,” said the Bank of England, “found that 5 to 8 per cent of UK mortgages by value were subject to forbearance in 2012, which was broadly unchanged from 2011.”

In the UK, chastened banks, many of whom are partially owned (via the government) by the taxpayer, don’t like the idea of repossessing properties. Then there is the issue of low interest rates. When they are that low, if a mortgagee gets behind with payments, why not give them more time, or so the bank might reason.

In the US it is not like that. In the US banks are more ruthless in their approach to repossessing property, but there is a good reason for that. In the UK, if a mortgage holder’s home is repossessed and it is worth less than the mortgage, it is up to the mortgagee to pay the difference. In the US, it is the bank’s responsibility.

So, US banks are more ruthless, but the consequences of negative equity are not quite as dire for US households.

So, will it happen? Will this latter day sword fall? Will the horse’s hair split? Mervyn King reckons UK interest rates won’t rise for some time. But just remember that the US economy and that of the UK are at different stages in their respective economic cycles. If the Fed, let’s call it Dionysus, increases rates, and the Bank of England (Damocles) doesn’t, there is a risk that sterling may crash. To avoid this, Damocles may have no choice to but to up rates to, as it were, cut the very horse’s hair he depends upon.

© Investment & Business News 2013

It used to be a magic formula. Never mind what is happening in the real world; in industry, in business. Never mind what is happening with wages and productivity. If house prices were rising, households felt as if they were better off, and went out and spent more as a result.

It happened in the UK. It happened in the US. Raghuram Rajan, a former chief economist at the IMF, argued in his book ‘Faultlines’ that rising house prices in the US made up for the growing gap in income distribution. So during a period in which median wages in the US hardly changed, house prices surged on the back of low interest rates, and plentiful supply of credit.

Government backed agencies Freddie Mac and Fannie Mae also helped to ensure that house prices only ever rose, and that consumers – most of whom had forgotten the very concept of savings because it no longer appeared necessary – enjoyed the perception of growing wealth as their home rose in value.

It ended in tears of course. These things do. Maybe it will end in tears again, this time with bond prices, as factors beyond the control of central banks force up inflation and in turn lead to higher real interest rates.

But in the UK, George Osborne came up with a cunning plan in his latest budget. It is called “help to buy” and is there to give first time buyers who can’t rustle up the necessary deposit a lift onto the housing ladder. He is also looking to help existing home owners move up the ladder, too.

It’s a bit like a UK version of Freddie Mac and Fannie Mae, and, of course, if our George can engineer house prices upwards, consumers will feel richer, spend more, and electoral success may belong to the Tories.

Alas, Andrew Brigden, a senior economist at economic consultancy Fathom, does not see it that way. He said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit… Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.” And to that the ‘Daily Mail’ and ‘Daily Express’ exclaimed with delight: “Look!– House prices are set to soar,” they said.

And with that, George Osborne is now preparing to create economic recovery with two new discoveries. Apparently, two plus two equals five, and black is white.

© Investment & Business News 2013

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Not one, not two, but three. It appears good news on the UK housing market is not like buses. You hang around waiting for ages, and instead of two coming along at once – which is what they say is happens in the world of public transport – with the housing market, three come along instead.

First off there was Rightmove. In April it recorded a 2.1 per cent rise in asking prices, taking average asking prices to £244,706. That is just a whisker, or £1,500 to be more precise, short of a new all-time high. Rightmove reckons that over the next month prices will rise higher still, and in the process will break through the all-time high level. In other words, house prices – or at least asking prices – are back, the downturn is over.

The Council of Mortgage Lenders (CML) provides the second piece of bullishness. It turns out that in the first two months of this year no less than 16,000 loans were advanced to first time buyers. That happens to be the highest level for a two month period in five years.

Finally, the Ernst and Young Item Club has forecast that that 2013 is likely to see housing transactions shoot up as one million families move home, from 800,000 seen in recent years. The Item Club said: “The UK housing market is now seeing a win-win of rising disposable incomes and increasing affordability factors whose impact will be multiplied by the Chancellor’s ‘Help to Buy’ scheme. With £3.5bn of government funds paying 20 per cent of the purchase price, the scheme can underpin 100,000 mortgages worth £200,000 each.”

Okay, it may be worth putting this in context. According to Nationwide data, UK house prices peaked in Q3 2007 with an average price of £184,131. In Q1 2012 the average price was £163,056. So asking prices may be on the verge of passing an all-time high, but selling prices are a long way off yet.

According to CML data, gross mortgage lending was £362,758 in 2007. In January and February it was worth a total of £21,880. Multiply that out by six and you get £131,000, which is way down on the levels of six years ago. Okay, the first two months of the year may be slightly quieter than, say, during the spring, but you get the picture. What is clear is that while mortgage lending may be rising, it is still way down on the levels seen during the boom.

But in the UK, we are slightly property obsessed. If house prices rise, consumers feel richer, regardless of what happens to their disposable income. When Brits feel richer because the value of their home has risen, they tend to spend more.

Signs that the UK housing market is in recovery mode may be good news for UK plc and may well lead to rising GDP. Look at it this way, falling house prices in 2007 were an early sign that the UK economy had hit the buffers.

The ‘FT’ on Saturday quoted Merryn Somerset Webb, famous as an arch property bear, saying she was considering buy-to-let investment: “On the basis that there is some yield and the government has clearly decided house prices are never to fall.”

There are two core reasons why UK house prices appear to be turning. Firstly it is the British psyche. The UK home owning public, and indeed would-be home owners are always susceptible to the notion that house prices are set to rise. Their blind faith in house prices become self-fulfilling. Secondly, the UK government is determined to avoid further falls in house prices, regardless of whether fundamentals suggest they should occur.

Such a policy may re-endear George Osborne to the UK electorate. But whether it is really good for UK plc in the long run is doubtful.

©2013 Investment and Business News.

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