Archive for the ‘UK Economy’ Category

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The UK’s credit rating could fall as debt concerns grow

November 11th, 2009

A leading agency, Fitch, has suggested that the record levels of UK Government debt could soon affect the UK’s credit rating.  Should this happen it will impact everyone, a lower credit rating means higher interest charges on UK debt.

Let’s put some figures on this.  Assuming a total debt of £800bn then a 0.1% increase in interest rates would cost the UK economy £800m per year, a 0.5% increase would cost the economy £4bn per year.  Due to the size of public sector debt just a small increase in rates could have a very significant impact on the cost of borrowing.

Another impact of a reduction in the UK’s credit rating could be to further devalue the pound, as a large importer this would increase costs to the economy.  For example the still a net importer of goods (the trade deficit was reported to be £7.2bn), any further devaluation could increase this deficit and create future inflationary pressures.

But all is not lost, the UK’s credit rating has not yet been affected, according to the leading agency reports (Fitch, Standard & Poor) much will depend on how the UK manages its debt, and in particular the disciplines that will be put in place to reduce the overall debt burden.

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Is the UK addicted to Quantitative Easing?

November 6th, 2009

Some analysts have suggested that the ongoing programme of quantitative (QE) easing has potentially creating an addiction for the UK economy such that if we were to stop QE it could have a negative recessionary impact.

So far the BoE has implemented £175 billion of QE with a further £25 billion announced yesterday. There is no doubt that QE has prevent a more severe recession, many analysts have reported this. But, the concern is what happens when QE stops, which it will at some point.

The current view by some is that the way QE has been implemented, effectively buying back Government bonds, has simply freed up “cash” for the previous holders of those bonds to invest elsewhere. According to some this “elsewhere” investment is actually the stock market which has seen a strong rally in the past 12 months. So one theory is, if QE stops, will this cause a fall in share prices and potentially trigger a contraction in growth and even possibly push the economy backward into negative growth?

No one knows for certain how markets will react, but clearly the action of halting QE will need to be managed in a way that minimises any negative impact on the economy. Perhaps more importantly is when will we start to withdraw the (current) £200 billion from the economy. When this happens it will have further effects possibly restricting growth and inflation. This last point could be relatively positive, unwinding the QE in the economy could help to prevent excessive inflation – which some have said may follow in the coming years.

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“Shock fall” in GDP of 0.4% in the three months to Sept 2009

October 23rd, 2009

The announcement that GDP fell by 0.4% in the third quarter of 2009 has taken the majority of analysts by surprise, many had been expecting positive growth of around 0.2%

Since the current recession started in 2008 we have now experienced a fall in GDP of around 5.9%, similar to the severe recession at the end of the 1970s.  Perhaps more worryingly is the fact that the economy contracted in all major sectors with production falling 0.7% and services falling 0.2%.

Some had been predicting that the bank was coming to the end of its £175bn quantitative easing programme.  But with the latest GDP figures it may suggest that there will be some more quantitative easing to follow.

If we go back to the words earlier this week from Mervyn King, then it seems that the Bank of England’s view is that we will probably return to growth in the “second half of 2009”, so we have one more quarter to go to (hopefully) see a return to growth in GDP.

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Why low interests prevent many property sales

October 16th, 2009

It may seem crazy but read on and there is some good logic here that explains how low interest rates could be contributing to the lower number of properties being sold.

We blogged earlier (30th September) about property sales trends being at an historic low, and that gross mortgage lending was around 36% down on last year and around 50% of “normal” lending levels.  There are many reasons as to why there are a lower number of completions but here is a new one, well at least we have not seen anyone else report on this.

An increasing number of property owners with mortgages are now benefiting from their lender’s standard variable rate (SVR), and in the majority of cases the SVR is tracking the bank base rate (BBR) currently at 0.5%.  The upshot is that a large proportion of property owners are benefiting from SVRs in the range 1% to 3%.  However if those same property owners wanted to move home they would, in the majority of cases, end up paying a higher rate of interest on their new mortgage due to the current lending criteria. 

To put some figures on this ….

  • Lets say you are currently paying 2% on your £100,000 mortgage, that is an interest payment of £2,000 p.a. 
  • The new house needs a new mortgage, and the rate being offered is 4%, giving interest payments of £4,000 pa.
  • The net impact is your mortgage payments increase by £2,000 p.a. with the same level of mortgage

So, if you were wanting to move to a slightly bigger house, or one near to the new school, etc, then you have to factor in much higher mortgage interest costs, thus creating a big “disincentive” for moving home.  Clearly this is a simplistic example but it highlights the point, staying where you are allows you to benefit from very low mortgage rates that in many cases will be lost if you move home.

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Low interest rates for years to come?

October 11th, 2009

Tomorrow the Centre for Economic and Business Research (CEBR) is expected to publish a report identifying low interest rates for years to come.  In particular the CEBR is expected to forecast that the bank base rate will remain at 0.5% until 2011, and that the base rate may not reach 2% until 2014.

The underlying basis for this research is a reduction in the budget deficit of £100bn over the term of the next parliament.  Such cuts in budget deficit will require a combination of reduced Government spending and tax increases, thus restricting economic growth, and hence the expectation that bank base rates will remain low to help prevent the economy going back into recession.

The scale and rate of cuts in the budget deficit is also expected to impact on currency exchange rates with the pound possibly sinking to $1.40 and potentially parity with the Euro.

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Austerity and Property Prices

October 7th, 2009

This week we have heard the phrase “age of austerity” by George Osbourne at the Conservative Party Conference; in effect referring to a period of greater financial prudence as the UK reduces its budget deficit. So what will this mean for property prices?

Already announcements have been made to prune £7bn off the mountain of debt, but clearly there is much more to come. 

As yet no one has said that there will be job cuts in the public sector, but it seems impossible to achieve the savings required without job cuts.  Clearly higher unemployment is going to affect property prices.

Another subject not yet receiving much attention is tax increases.  The level of savings needed to reduce public debt are likely to require substantial increases in tax revenues, leaving us all with less money to spend.  Clearly such action is again going to impact on property prices.

Over the next few months each of the main political parties will unveil more details on how the budget deficit will be addressed, as they do it will become clearer on how we are all going to be affected, and in particular for this blog, how it will impact property prices.  

Visit our blog again later for further updates on the impact on UK property prices.

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Why banks are restricting lending to property buyers

October 6th, 2009

Put simply the banks still do not have enough money to lend, something many property buyers may have realised or at least suspected, but why is this so?

As at September 2009 it is estimated that banks operating in the UK had a combined liquidity of £280bn, this is liquid assets, as defined by the FSA, that a bank could readily call upon.  The total of £280bn may seem a large figure and in some respects it is, but it has been determined that the banking industry may need a total of £620bn in qualifying liquid assets, and at the very least £390bn giving an effective shortfall of £110bn.

The result of the shortfall means that banks must take action to increase their liquidity, such action not only restricts the amount banks can lend but it also impacts on their profitability.

The potential danger of the liquidity targets effectively imposed by the FSA is that bank lending will be restrained, both in the amounts lent and the cost of lending, to enable banks to put in place the liquidity targets. 

Some analysts are concerned that the targets imposed could restrict support for economic growth at a time when reduced public spending and potential tax rises will also start to impact the economy from 2010.  Potentially the combination of cut backs in government spending and restricted bank lending could have a double blow for the property market; which may result in a more protracted and “bumpy” recovery.

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Posted in Property Buyers, UK Economy

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Is a cap on bankers’ bonuses the right solution for our economy?

September 1st, 2009

There are alternatives ….

There seems to be an increasing number of politicians calling for a cap on bankers’ bonuses, is this because they believe it will ensure a more effective banking system for the British economy, or is this considered a popular statement to get votes?

Clearly it is in the UK’s interests for the banks to operate in a way that we do not have a repeat of the credit crunch, but a cap on bonuses is not the solution.  Bonuses must be based on performance, if a banker performs well they should be rewarded appropriately, simply applying a cap on bonuses will put a cap on performance.

Whilst some degree of regulation could help to ensure that bonuses reflect longer term (sustainable) performance an alternative approach is to make the consequences of bank failure high, very high.  

Right now we have a clear example.  The UK has invested huge amounts of taxpayer revenues into the banks.  What would hurt the banks is if the shares are sold back at the maximum profit the UK tax payer can make. Most banks are going to recover and will increasingly start to report large profits again, as a result their share prices will start to rise.  If the UK Government sells back those shares at only a small premium to what was paid for them then the banks have effectively been given a low interest loan! (which is a bit ironic in that they are not providing cheap mortgages). Alternatively if the UK Government holds onto those shares to benefit from selling at a significantly higher share price, then the cost to the banks will be much higher.

Another example.  Regulation could be established such that any bank deemed to have fallen into a category where there is a high risk of failure then penalties can be applied by selling part of the bank’s shares to the Government at a massively reduced price e.g. 10% of value. The cash received would restore the bank to a safe operating level, but the penalty paid by shareholders would be high, and the risk to shareholders would drive much safer bank operating practices.

Cleary the examples above are simplistic, but the underlying strategy is compelling, make the price of failure for banks high enough such that they will avoid failure. We must avoid a solution that caps banks performance to create middle of the road businesses that do not help to grow the UK economy.

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Buying a property with a tracker mortgage

August 31st, 2009

Historically buying a property with a tracker mortgage has been a good deal for those who can manage with their mortgage payments going up and down in line with the lender’s SVR or bank base rate. On average these tended to be a good deal for both the borrower and lender over a period of time. But it seems this is no longer to be the case.

 
The Sunday Times published an article (30/08/09) where they investigated the margins made on tracker rates in today’s market, what they found made for very interesting reading. On average lenders are charging £414 more per month on tracker mortgages than in January 2008, in effect the lenders have increased their margins over 3 month Libor which relates more closely to the cost of obtaining funds.

 
So today’s average tracker mortgage is now 3.07% higher than the Libor rate of 0.69%. Lenders are now making almost record profits with tracker mortgages. It also appears that many lenders are steering property buyers towards tracker mortgages by making the arrange fees / costs considerably higher for fixed rate mortgages.

 
Some analysts are now reporting that the higher costs of tracker mortgages could have a negative impact on economic recovery as it is effectively reducing the disposable incomes available to those with mortgages (the majority of the working population).

 
But perhaps there is an even bigger problem looming on the horizon. Some tracker deals have lock-ins, in effect if you redeem the mortgage in the next 1, 2, or 3 years you will have to pay penalty fees. With base rates predicted to increase (see our previous article here ) it means that tracker mortgages, and in particular bank base rate tracker mortgages, could become very expensive in the next 2 years. To put some figures on this, when bank base rates get back to 4% then the average tracker mortgage could go to 7% or more.

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Posted in Mortgages, UK Economy

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What people are saying in August 2009

August 19th, 2009

Reading through the press reports today it seems that we have more contradictory information on the UK property market, however we still stand by our summary published on 16 August … http://www.repaymortgage.co.uk/blog/2009/08/16/uk-house-price-predictions/

One of the leading estate agency companies released a report stating that property asking prices have fallen 2.2% in August 2009, with the comment that this is not a double dip in property prices as they saw a similar fall in August 2008.  Well we disagree, we think that asking prices are volatile in the thin market where the volume of sales is well below the average, we remain confident that we will see prices falls over the winter of 2009 / 2010. 

RICS are reporting that 10% of sales are failing due to difficulties in obtaining mortgages, and this is causing whole chains of buy-sale transactions to fail.  With no short-term improvement seen for finance availability it is likely that this type of problem will continue for some time to come.

Some experts are reporting (such as David Smith of Carter Jonas) that a slight increase in interest rates could have a significant impact on the property market as more homes are put up for sale by those who can no longer afford their mortgages.  We agree with this viewpoint and expect it to have a significant impact especially when combined with increasing unemployment.

On the positive side there are noises coming from Barratt suggesting they maybe about to launch a £500m rights issue.  We think this may suggest they are gearing up for future house building, possibly seeing a demand increase from the back end of 2010.

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Posted in UK Economy, UK House Prices

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