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azzuri · 'Our Scotland' Fossil Joined: 12 Sep 2005 Posts: 3777

"Mortgaging our futures" - An essay on our times (1st Draft)
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We all remember the phrase 'an end to boom and bust' the original economic mantra of the New Labour project and to think - they almost had us believing it!

On the surface of our current economic climate things look quite rosy, we earn more on average than ever, food is cheaper, electrcial white goods more affordable, our houses are worth more, stock markets inching back towards their all time highs and credit is easily available to afford the lifestyles of our choices. But scratch beneath the surface of all of this seemingly bountiful situation and a darker reality is clearly visible.

Lets go back in time to those fateful days of 1997, a new Labour government following years of conservative party leadership and the huge growth in the stock market which led to the dot.com boom and anaylse the cause and effect over the course of the New Labour legacy.

Remember those years when everyone seemed to be investing in shares? share options became an office watch-word and everyone seemed to be concerned by the performance of their portfolios attentively watching the stock market avidly from the comfort of their home or office. Investment clubs became an new social phenomena and on paper people began to feel very wealthy.

In reality many people lost large sums or a lot of paper profit in the global shares fall but those who withdrew from the markets at the right time (by about mid-2000) found themselves with money to invest and a stock market that wasn't looking as healthy. Many others still maintained their depreciated holdings waiting for the days when the market would boom once more.

Additionally unless you were a professional investor its unlikely you had borrowed to buy shares so whilst a market fall might reduce pensions and share values as a whole because individual share ownership was limited and lending to fund shares low it didn't present a negative equity issue. For many people the bust of the stockmarkets at the end of the dot.com period somehow didn't create the expected large scale recession.

After 9/11 the US set interest rates at 1% in order to encourage spending and promote confidence, similarly over this period the tax rates for higher income earners were reduced. What followed didn't just support house price inflation in the US but the rate change encouraged many countries to set their lowest interest rates in recent history between 2001-2004. One of the key problems in a globalised economy is that economic descisions in one financially powerful country can have a knock-on effect globally.

With rates so low the collapse in the stock market meant for those for whom cash was still on hand needed a new investment vehicle and with prompting from TV shows such as Changing Rooms and its ilk, changes to BTL arrangements terms and lower pensions returns the commodification of housing stock developed to a new level never seen before in the UK.

The statitics from the Council of Mortgage Lenders (CML) bare this view out:

CML - total mortgage lending per year

Year £m
1981 12,000
1982 15,300
1983 19,300
1984 24,000
1985 26,500
1986 36,900
1987 35,300
1988 49,300
1989 44,200
1990 43,400
1991 42,200
1992 33,500
1993 54,100
1994 57,900
1995 57,300
1996 71,700
1997 77,200
1998 89,400
1999 114,600
2000 119,900
2001 160,200
2002 220,600
2003 277,200
2004 291,500

Compare this to a chart measuring the FTSE 100 index figures over the same time and you'll realise where much of the populations investment finance was re-directed. People began to buy second, third even forth homes, property for their children at University and some amateur investors even starting BTL portfolios.

Another important consideration is that in the last property market crash in 1989 the total borrowing increases weren't anywhere near the current scale. In the ten year period between 1989 and 1998 the total amount borrowed for mortgages roughly doubled from £44.2 billion to £89.4 billion per year. In the five year period between 2000 and 2004 mortgage lending has risen by about two and half times from £119.9 billion to £291.5 billion.

The pensions crisis which followed on from the 2000 stock market crash also helped fuel the housing market as many turned to property developing, owenership and BTL's in order to find other ways to supplement long term incomes. With interest rates at such a low level for the last 5 years the biggest issue for the government is now the lack of savings by the general population.

We have also seen a tiering or stratification in the housing market. Whereas ten years ago it was reasonable to assume one might be able to afford a family home by saving longer many larger buildings have been split up into flats and many new build flats have created a larger price bracket between flats and houses than ever before. This has also promoted further borrowing. A 50% increase in house price on a £100,000 one bed flat becomes £150,000, the same multiplier used for a £400,000 family home becomes £600,000 and thus both even more unaffordable, against an income multiple, but also represents four times the one bed flat appreciations £50,000 addition to UK Net Worth.

First time buyers are at the lowest level for 25 years and now make up a mere 7% of the market, significantly down from the historical average of well over 30%. Much of the lending being recorded by the CML therefore isn't new mortgages and almost half of the yearly total borrowing is now made up of re-mortgages on property at new valuations. The tiering effect means that the previous average percentage deposits of past FTB's is impossible to match. Effectively it takes years longer to save a smaller proportion of the properties value and todays FTB's have saved longer to put in a deposit which represents a smaller share than ever in their property.

Often whilst saving the property saved for has outstripped savings growth so far that the same savings might not even represent 5% of a properties current valuation when they were already 10% of that same properties value only 5 years ago. The low interest rates would have meant that the same sum of savings might not even have appreciated enough to keep up with interest rates in any high-interest bank account. This means that many FTB's are now being hit by two unexpected factors if the deposit is less than 10%. Firstly at a lower percentage deposit many of the best rates for mortgage lending are unavailable to FTB's and secondly many bank and building societies add a Higher Lending Charge (HLC) or Mortgage Indemnity Guarantee (MIG) to the overall loan amount.

When the older style mortgage deals deals weren't any longer affordable we saw the 100% mortgage, even the 110% or higher LTV mortgage being offered, the long standard average income multiple for housing of 3x to 3.5x became over 6x or more, not just in Central London but in cities, towns and villages all over the country. Dual-income families also fuelled prices rises but then can seriously restrict options over child parenting later in life. Other schemes to market include the family offset mortgage and guarentor mortgage with both allow substantial funds to be contributed into a First Time Buyers lending. Up to a quarter of all FTB's now have some kind of family assistance in order to enter the market.

Tiering also means whilst there have been FTB's in the market over the last few years the average size and quality of first time property has reduced. Many have bought under the assumption that it was better to buy and get some appreciation from a smaller property than to save for a larger one and for a large number of people this has been a sensible move. But it has distorted our ability to recognise the fall in buying power of FTB's to levels even lower, propertionally to income, than any other house price market in UK history.

So this means that an FTB in the current market has less bargaining power, less purchasing power and more likely than ever needs extra financial support from family to get on the ladder. And they still only make up 7% of the total mortgage market!

In 2004 the UK increased in value by £404 billion on the previous year to a total of £5.8 trillion. The office for national statistics shows that the UK total net worth has increased far too quickly since 2001:

UK - total net worth

Year £m
1988 2516061
1989 2723770
1990 2651523
1991 2662796
1992 2590762
1993 2825656
1994 2806213
1995 2774836
1996 2936392
1997 3112333
1998 3316325
1999 3722956
2000 4215627
2001 4389831
2002 4996768
2003 5438889
2004 5842651

As is clearly illustrated this recent rise is far above the historical growth norm and we now investigate those economic descions made by the New Labour government that have allowed markets to force the common person to be disadvantaged more than ever.

Halifax reports that the UK Total Housing Market valuation by the end of 2004 had reached the £3.3 trillion mark. This means that the amount of the housing sector alone in our economy now exceeds the entire UK Net Worth Total of £ 3.1 trillion in 1997. We have therefore essentially raised the prices of our homes and borrowed against that new valuation in order to fund our lifestyles, fuel economic growth and ride out a downturn in potential returns on the stock markets.

Also consider that as the value of UK Plc has grown astronomically over the lst 5 years the actual GDP growth in has hit ten year lows of barely 2%. This means instead of rising between 2003 and 2004 by £404 billion we might have expected the economy to grow at about £100 to £200 billion... the CML table shows quite clearly that most of this Net Worth 'growth' has actualy come through Mortgage Borrowing and that this practise has probably been the case since 2001.

Why hasn't this been recognised you may well ask, it only takes a brief review of the structure of Gordon Brown's fiscal 'Golden Rules' to show how the rules haven't changed... but the indexies used to judge them have been switched to more preferrable models... its made inflation look very low over the last 5 years when in real terms we've all seen not only house prices but travel, energy bills, council tax and a myriad of other costs escalate far beyond the headline figures.

With House prices at record levels it might be tempting to look elsewhere to invest but it may suprise you to realise that the stock market FTSE 100 listings are back to nearly within 1,000 points of the market valuation at the height of the dot.com bubble! Gold is already at an aproximate 25 year high.

The first economic point for any commodity, houses included, is that the property is only worth what others are willing to pay and can actually afford. We have reached the point where most of those outside the market either are not willing to pay the sums being asked or are not able to afford the prices either to get on the ladder as a first time buyer or move up into bigger houses.

The key thing to remember is that we've borrowed to fund all this spending and we've grown a habit of borrowing more proportionally than ever before.
Our overall debt went past the 1 trillion pound mark in 2004 and has since grown at a rate faster than ever recorded to reach about £ 1.15 trillion today, remember that in 1997 when NEw Labour came to power the amount of total personal debts was in line with historical norms and was only aprox. £500 billion. in short we borrow well over twice now than we did at the start of the New Labour project.

The number of insolvencies and bankruptcies has started to rise as credit tightening measures have begun to be introduced for some borrowing such as in the Buy To Let market. The actual level of activity in the market isn't any greater than it has been for each of the past 10 years which means all the debt increase is being caused by higher prices and higher borrowing levels - not by new homes in the market.

The only long term winner here is the banks and building societies. Again the statistics support this and the 'business and financial services' sector has been the strongest performing area of the UK economy over the last few years. To a large extend this is misleading as the sector has grown by us ploughing more money back into its profit balances through higher borrowing. Meanwhile manufacturing, a better judge of the economies true success, has fallen to a historical low almost without being noticed.

That food and white goods are cheaper is well known but the flip-side to these deflationary goods has been the outsourcing of our jobs to the rest of the world. The forced might of the super-chains such as Tesco and Wal-mart constantly pushing foreign foodstuffs suppliers into ever cheaper deals that leave them with increasingly smaller margins. Most mainstream electrical goods and clothing is generally produced in cheap asian labour markets which don't have the social infrastructures to support individuals, such as health and safty regulations, or even democratic rights and values such as trade unions or workers rights.

The way in which we view our economy in the UK has been altered too. New assessments of inflation use the Consumer Price Index (CPI) and not the long term measure of the Retail Price Index (RPI). The way in which the CPI is calculated means it generally will always allow for a significantly lower inflation value than the RPI. Unemployment has been masked by increases in long term incapacity and illness coverage and increased paperwork and requirements for interview attendance so it no longer describes the number of the population out of work but instead is now only repesentative of the number of those eligable for unemployement benifits.

Employment figures are also masked as the opening of UK work markets to the Eurozone has allowed many migrant workers to enter the UK and take up low paid positions in the employment market. However many of these workers are not keeping their capital assets such as savings and investments in the country and their contributions to the figures mean that Employment looks high but that much of the earnings are being pumped back into their home markets, such as in central or eastern europe.

So what has New Labour really delivered; we now officially owe more than ever, take longer than ever to buy a first property, take longer than ever to start families (at a health risk), live longer but have to work longer, have less to retire on and fewer savings, less social mobility caused by a bigger earnings gap between the top and bottom income quartiles. Oh, and we're also more inclined to be less fit, more overweight, more stressed, single and more depressed.

If you thought all this was bad its worth considering the compounding factor - its not just the UK where all this is true. Most of Europe, North America, Australia, some parts of Asia are all in varieties of the same situation... if house prices crash or rates rise in other countries at the same time as here the largest global recession on record might ensue. This has the potential to cause a very bleak economic outlook for perhaps up a decade or more whilst asset values revert back towards the long term norms.

Australia and the US have begun to see the fall and in many other countries house price markets are now stagnating or falling. UK Base Rates are still very low against a typical interest rate of between 7-9% over the last 20 years. But the current figures are low because the real costs of inflation have been hidden by changes in the ways those economic 'Golden Rules' have been re-written and actual inflation is probably closer to 5%.

So this explains why the dot.com boom never seemed to have a bust, we borrowed to ride us over the effects, house prices gave us a false sense of security with their inflated valuations and the key economic indicators that should have alerted us have been so badly altered by Gordon Brown that they no longer serve their basic purpose - to report the status of the economy!

The soft landing of the stock market and housing markets are a phantom economic miracle and our economy has been permitted to overheat at a cost to us all, not just in financial terms but more importantly in social risks and life choice options.

Those of us who have been waiting for a market crash may one day rue the scale at which it could impact the lives of those around us. Whilst many of the fiscally realist have saved and watched prices avidly for the inevitable downturn in the market all of us have friends, family and colleagues who will have borrowed too much either on their homes or in their personal credit.

A 2004 OECD paper noted the following in a study of 17 countries the UK was the country with the private consumption growth correlation to house prices inflation. In other words we were the country most likely to spend it if we thought we had it to spend!

It is my opinion that if the UK Plc is now overvaluing its housing stock market by potentially 20-30% then the contribution to overvaluation of the total UK Net Worth would be almost a third of the £ 3.3 trillion in housing assets and so could thus be in excess of £1 trillion. We have also amassed over £500 billion in new secured personal borrowing, mostly against these property assets, since the Labour victory of 1997.

This would mean aproximately £1 - £1.5 trillion of the entire UK Net Worth, currently at a little over £6 trillion, doesn't really exist and is in fact a huge scale accounting mistake based on overvaluation of our property markets and further compounded by vast personal borrowing against these new valuations!

Now we enter a perilous situation. A cut in rates could push things further into the red and increase borrowing still further. However even a moderate rates rise might be the pinprick required to finally burst this bubble. I suspect however that we'll allow the BoE to continue to sit on the fence with quarter point changes to the base rates until outside intervension means that the last straw can be blamed on external economic factors - so when you get told the recession started because of the US, Australia or Eurozone inflation - remember not to believe it. Companies in the US such as Fannie Mae the privatised Federal Mortgage Lending Agency are now in precarious positions regarding their borrowing and the fall of one of more such agencies could spark the ripple effect. Fannie Mae is noted as having an aproximate 78:1 borrowing ratio against its assets with total lending of well over $1 trillon dollars to US mortgage borrowers.

Gearing and leverage on purchases have reduced to levels where even a moderate rate change by the BoE has potential to make repayments unaffordable for huge numbers of individuals. A prolonged period of low interest rates has had a dual effect both encouraging propensity to borrow and making the entire economy far more suseptable to historically comparative minor rate changes of 1 or 2% points. The introduction of large scale Mortgage Equity Withdrawals (MEW) and the return of the Endownment Mortgage under the headline Interest Only have futher made actual capital repayments even more unlikely. Essentially housing has become a new way to borrow more, for a smaller initial sum comparitively and without neccessary repayment of capital debt.

Some people will still tell you that the housing market could stagnate or even grow whilst wages catch up. Unless everyones salaries could be doubled tomorrow there is no way this level of borrowing can be sustained. The average national wage is still a little under £29,000 pounds whilst the average property is well over 5 times this figure. And don't forget even if wages were doubled the higher tax bracket would mean less income proportionally as most of the rise would be assessed at 40% tax.

The New Labour concept of fighting poverty and hardship might instead have shifted the risks of the economy onto the middle classes and amateur investers and with any asset revaluation changes the picture of UK Plc looks rather less healthy on closer examination. Current figures of the recent falls noted in the quarter 4 HBOS report are being explained by the new Home Information Pack legislation or that Scotland is now leading the latest rise in HPI. But in reality Scotland has never led UK HPI and is only still rising based on its affordability as compared to the rest of the UK market. Similarly the new Home Information Packs costing aprox £600 won't explain falls of even 1% in asking prices.

Those who says house prices always rise are generally right when the market is looked at over a long term period, such a twenty or thirty years but try to say that in Japan where prices have fallen consecutively through 14 years and you'll get a different response. The low intrest rate fuelled boom caused a banking crisis as mortgages and loans couldn't be repayed and consequently the growth/debt spiral effects went into reverse for many years after the Japanese market peak in 1991/1992 causing a large scale recession.

Typically the housing market peak seems to be 2-3 years after a stock market peak within each economic cycle. The peak for the UK Property Market appears to have been in 2004 and through 2005, rather than seeing any correction, we have seen a combination of ongoing hotspots and market levelling make HPI appear to have risen by a small amount nationally, but this has masked further borrowing at higher rates and small areas of already falling prices.

If Tony Blair wants to be remembered at all positively in the public eye for the long term he has no time to build a political legacy... the reigns should be handed over to Gorden Brown as soon as possible so he can take full responsibility for mortgaging our futures.

- Pye ( - property speculation ninja )

References:

http://www.statistics.gov.uk/STATBASE/Expo...heets/D4079.xls
http://www.cml.org.uk/cml/statistics
http://focus.squaregain.co.uk/en/quick/uk/index.html
http://www.statistics.gov.uk/cci/nugget.asp?id=479
http://www.statistics.gov.uk/statbase/TSDdownload2.asp
http://www.esrcsocietytoday.ac.uk/ESRCInfo...urcePageId=6970
http://www.bankofengland.co.uk/publication...in/qb040401.pdf
http://www.creditaction.org.uk/debtstats.htm
http://www.hbosplc.com/economy/includes/05...ousingStock.doc
http://www.olis.oecd.org/olis/2004doc.nsf/.../JT00175524.PDF
http://www.economist.com/finance/displaySt...tory_id=4079027
http://www.clevelandfed.org/Research/ET200...6/economies.pdf
http://www.thebusinessonline.com/Stories.a...EE-222A95DED588
http://www.lep.co.uk/ViewArticle2.aspx?Sec...ticleID=1331509
http://www.fool.com/news/commentary/2004/c...ary04100602.htm
http://business.scotsman.com/economy.cfm?id=143692006
http://www.statistics.gov.uk/cci/nugget.asp?id=946
http://www.mailtribune.com/archive/2005/07...ories/02biz.htm
http://news.bbc.co.uk/1/hi/business/3701070.stm
http://www.moneyweek.com/file/2179/uk-housing-crash.html
http://www.moneyweek.com/file/2525/nasty-combination.html
http://hicks.nuff.ox.ac.uk/users/cameron/l...2004housing.pdf
http://money.guardian.co.uk/property/first...1181034,00.html
http://www.findaproperty.com/story.aspx?storyid=2942
http://www.findaproperty.com/story.aspx?storyid=5512
http://www.thisismoney.co.uk/mortgages/mor...5&in_page_id=58
http://news.bbc.co.uk/1/hi/business/1228152.stm
http://www.scotland.gov.uk/library5/finance/ser04-04.asp
http://www.thisismoney.co.uk/mortgages/mor...0&in_page_id=58
http://www.thisismoney.co.uk/news/article....75&in_page_id=2

Disclaimer:

I'm not an Economist but I've read a lot of economics texts and tried to piece the puzzle together. Once you take the position that we're still in the same economic growth cycle that began at the last HPC in 1989 the contents of this essay begin to make a lot more sense.

All comments appreciated.

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