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Friday 15 August 2014
Friday 15 August 2014
Friday 15 August 2014
Friday 15 August 2014
In the past few months, the clouds have parted, the gloom has lifted, and Britain is booming. Unemployment is down, investment over the past three years is up, and all is well. The recession is over, and as a result, there is a plausible feeling in the air that no one needs to worry about anything.
The relentless upbeat forecasts, coupled with the fact that a general election is now ten months away, are in no way connected and merely coincidental. After all, with things being so positive, why wouldn’t the government want people to know the economic bad times are behind us?
Of course, there are hidden dangers in our currently bullish outlook on the state of the country, the main one being our collective temptation to return to the good old days of 2007.
Much of the rhetoric coming from the media in the past few months has centred around the notion that the tough times are over and that we will be able to enjoy life as we did before the crisis.
This, as many of us know, is a fantasy. This isn’t to say that we must live in penury forever, but the patterns of spending and borrowing that developed between 1997 and 2007 are luxuries none of us can afford.
If the country has truly economically recovered (something none of us can really take for granted), and if it is a recovery that can sustain itself in the long term (again, questionable), we must still accept how our individual and national circumstances have changed.
Housing, pensions, and savings are key areas where vigilance is essential. Economic confidence should not translate into complacency.
Housing
Britain is experiencing a housing boom not dissimilar to the one that peaked ten years ago.
At about the time Sarah Beeny and Laurence Llewelyn-Bowen dominated TV schedules with property makeover programmes, the rest of the country was obsessed—Dutch tulips style—with their ever-increasing property prices.
A few savvy investors saw the housing boom for what it was: an opportunity to buy cheap, sell high, and get out of the market as quickly as possible before it imploded.
Many others, less experienced and more trusting, borrowed their way into negative equity. When the value of their new homes nose-dived, they were left with huge repayments on properties that had been overvalued.
George Osborne, in need of a measure to kick-start the economy after the effects of post-recession austerity, turned to the property market.
The Help to Buy scheme, originally intended to assist first-time buyers in getting a foot on the property ladder, offered them a loan, in addition to a minimum 5% deposit, of up to 20% of the value of a new home priced at up to £600,000.
Previously, assembling a 25% deposit on a home had been challenging for most middle-income families, but finding 5% was much more realistic. The scheme began to overheat the housing market, particularly in the South East, once it was extended to home movers as well as first-time buyers.
The possibility of purchasing properties well beyond one’s means quickly developed. While this was exciting news for the impulsive and naive, it now presents Britain’s homeowners with a significant quandary.
In April this year, in a bid to cool the housing market, the government imposed strict new lending regulations on banks and building societies. These regulations require borrowers to prove they have an excellent credit history and minimal debt commitments. Affordability assessments also now include a “stress test” in case of interest rate rises.
Strict limits on borrowing amounts were introduced as the government struggled to rein in a housing market in imminent danger of spiralling out of control.
Perhaps the biggest challenge for homeowners is yet to come. The Monetary Policy Committee of the Bank of England, led by Governor Mark Carney, has been debating a rise in the base interest rate for the last twelve months.
As the economy improves, the historically unprecedented 0.5% base interest rate that has kept the country afloat for the past half-decade looks set to increase. In his recent annual Mansion House speech, Carney strongly hinted at an imminent rate rise.
This may be bad news for homeowners as more of their available income is absorbed by mortgage repayments. However, it underscores the urgency for many to renew or move onto fixed-rate mortgage deals.
Banks, predictably, have already begun raising the costs of their fixed-rate mortgage deals, anticipating a surge in demand for such products. While the combined effects of potential rate rises and new restrictions seem to have temporarily cooled the housing market, how long this will last is uncertain.
Pensions and Savings
For some, Mark Carney’s words will be gratefully received. An interest rate rise for savers will feel akin to the first drops of rain after a long drought.
Since 2008, savers have seen little return from their nest eggs and, not unreasonably, have felt unfairly penalised by low interest rates.
Savers have been prudent with their money, while much of the nation’s current straitened circumstances stem from excessive and imprudent spending and borrowing.
Pensioners and older people who have relied on interest from savings for daily expenses have faced a significant shortfall in their financial wellbeing over the past half-decade.
Interest rate increases in the coming year might only be marginal, but for savers, they will represent a step in the right direction.
Throughout the recession, pensioners saw their primary source of income—their pensions—affected by crises in the annuities market.
The slump in annuities led to widespread low returns on pensions, which partly explains the jubilation when the Chancellor of the Exchequer made annuity policies non-mandatory for a range of pension types.
The Daily Mail recently reported that pensioners’ incomes have only just begun to rise above the rate of inflation for the first time since 2011.
On average, pensioner households were receiving £503 per week in 2009, a figure that had dropped to £477 per week by last year. The figures, compiled by the Office for National Statistics, provide a retrospective analysis, so 2014 data is not yet available.
The Future
The brief housing market boom unleashed by the government will likely taper off over the next two years.
Strict lending limits and rising borrowing costs will help re-establish sanity, though prices are likely to remain both high and stable as fewer people can borrow beyond their means.
Savings will be better rewarded as interest rates rise, but much depends on the future performance of the economy.
The fall in unemployment is largely due to an increase in zero-hours contracts, freelance work, part-time hours, and low-wage jobs. While the government describes this as workforce flexibility, for many it represents a precarious existence.
A low-wage economy with high property prices and an ever-shrinking welfare safety net often leads to increased consumer borrowing to make ends meet, which inevitably results in defaults and a credit crisis.
The potential departure of Scotland from the union, which may still occur in September, could also cause significant economic disruptions, as could Britain’s possible exit from the European Union.
These wildcard factors, combined with our current hyper-flexible and insecure workforce, make it too early to declare a lasting and robust recovery.
If that recovery is derailed, the Bank of England will quickly retreat from plans to raise interest rates.
In the long run, however, an interest rate rise is probably the healthiest path for the economy. Incentivising saving and cooling an overheated housing market are both worthwhile objectives.
In the past few months, the clouds have parted, the gloom has lifted, and Britain is booming. Unemployment is down, investment over the past three years is up, and all is well. The recession is over, and as a result, there is a plausible feeling in the air that no one needs to worry about anything.
The relentless upbeat forecasts, coupled with the fact that a general election is now ten months away, are in no way connected and merely coincidental. After all, with things being so positive, why wouldn’t the government want people to know the economic bad times are behind us?
Of course, there are hidden dangers in our currently bullish outlook on the state of the country, the main one being our collective temptation to return to the good old days of 2007.
Much of the rhetoric coming from the media in the past few months has centred around the notion that the tough times are over and that we will be able to enjoy life as we did before the crisis.
This, as many of us know, is a fantasy. This isn’t to say that we must live in penury forever, but the patterns of spending and borrowing that developed between 1997 and 2007 are luxuries none of us can afford.
If the country has truly economically recovered (something none of us can really take for granted), and if it is a recovery that can sustain itself in the long term (again, questionable), we must still accept how our individual and national circumstances have changed.
Housing, pensions, and savings are key areas where vigilance is essential. Economic confidence should not translate into complacency.
Housing
Britain is experiencing a housing boom not dissimilar to the one that peaked ten years ago.
At about the time Sarah Beeny and Laurence Llewelyn-Bowen dominated TV schedules with property makeover programmes, the rest of the country was obsessed—Dutch tulips style—with their ever-increasing property prices.
A few savvy investors saw the housing boom for what it was: an opportunity to buy cheap, sell high, and get out of the market as quickly as possible before it imploded.
Many others, less experienced and more trusting, borrowed their way into negative equity. When the value of their new homes nose-dived, they were left with huge repayments on properties that had been overvalued.
George Osborne, in need of a measure to kick-start the economy after the effects of post-recession austerity, turned to the property market.
The Help to Buy scheme, originally intended to assist first-time buyers in getting a foot on the property ladder, offered them a loan, in addition to a minimum 5% deposit, of up to 20% of the value of a new home priced at up to £600,000.
Previously, assembling a 25% deposit on a home had been challenging for most middle-income families, but finding 5% was much more realistic. The scheme began to overheat the housing market, particularly in the South East, once it was extended to home movers as well as first-time buyers.
The possibility of purchasing properties well beyond one’s means quickly developed. While this was exciting news for the impulsive and naive, it now presents Britain’s homeowners with a significant quandary.
In April this year, in a bid to cool the housing market, the government imposed strict new lending regulations on banks and building societies. These regulations require borrowers to prove they have an excellent credit history and minimal debt commitments. Affordability assessments also now include a “stress test” in case of interest rate rises.
Strict limits on borrowing amounts were introduced as the government struggled to rein in a housing market in imminent danger of spiralling out of control.
Perhaps the biggest challenge for homeowners is yet to come. The Monetary Policy Committee of the Bank of England, led by Governor Mark Carney, has been debating a rise in the base interest rate for the last twelve months.
As the economy improves, the historically unprecedented 0.5% base interest rate that has kept the country afloat for the past half-decade looks set to increase. In his recent annual Mansion House speech, Carney strongly hinted at an imminent rate rise.
This may be bad news for homeowners as more of their available income is absorbed by mortgage repayments. However, it underscores the urgency for many to renew or move onto fixed-rate mortgage deals.
Banks, predictably, have already begun raising the costs of their fixed-rate mortgage deals, anticipating a surge in demand for such products. While the combined effects of potential rate rises and new restrictions seem to have temporarily cooled the housing market, how long this will last is uncertain.
Pensions and Savings
For some, Mark Carney’s words will be gratefully received. An interest rate rise for savers will feel akin to the first drops of rain after a long drought.
Since 2008, savers have seen little return from their nest eggs and, not unreasonably, have felt unfairly penalised by low interest rates.
Savers have been prudent with their money, while much of the nation’s current straitened circumstances stem from excessive and imprudent spending and borrowing.
Pensioners and older people who have relied on interest from savings for daily expenses have faced a significant shortfall in their financial wellbeing over the past half-decade.
Interest rate increases in the coming year might only be marginal, but for savers, they will represent a step in the right direction.
Throughout the recession, pensioners saw their primary source of income—their pensions—affected by crises in the annuities market.
The slump in annuities led to widespread low returns on pensions, which partly explains the jubilation when the Chancellor of the Exchequer made annuity policies non-mandatory for a range of pension types.
The Daily Mail recently reported that pensioners’ incomes have only just begun to rise above the rate of inflation for the first time since 2011.
On average, pensioner households were receiving £503 per week in 2009, a figure that had dropped to £477 per week by last year. The figures, compiled by the Office for National Statistics, provide a retrospective analysis, so 2014 data is not yet available.
The Future
The brief housing market boom unleashed by the government will likely taper off over the next two years.
Strict lending limits and rising borrowing costs will help re-establish sanity, though prices are likely to remain both high and stable as fewer people can borrow beyond their means.
Savings will be better rewarded as interest rates rise, but much depends on the future performance of the economy.
The fall in unemployment is largely due to an increase in zero-hours contracts, freelance work, part-time hours, and low-wage jobs. While the government describes this as workforce flexibility, for many it represents a precarious existence.
A low-wage economy with high property prices and an ever-shrinking welfare safety net often leads to increased consumer borrowing to make ends meet, which inevitably results in defaults and a credit crisis.
The potential departure of Scotland from the union, which may still occur in September, could also cause significant economic disruptions, as could Britain’s possible exit from the European Union.
These wildcard factors, combined with our current hyper-flexible and insecure workforce, make it too early to declare a lasting and robust recovery.
If that recovery is derailed, the Bank of England will quickly retreat from plans to raise interest rates.
In the long run, however, an interest rate rise is probably the healthiest path for the economy. Incentivising saving and cooling an overheated housing market are both worthwhile objectives.
