Saturday, November 30, 2013

How Soon Will the Housing Bubble Burst?

Great to see that the new Bank of England Governor Canadian Mark Carney finally catching me (and many other concerned bloggers) up.

Many informal commentators pointed to a growing problem with personal debt, the use of payday loan companies, credit cards which seems to be fueling the upturn in consumer spending, but the chancellor, the Governor and organisations such as the BCC and CBI didn't even mention it.

How could an economy go from being at the jaws of a triple dip recession and the chancellor losing the country its triple A credit rating to growth in just a couple of months? The answer if course is Funding for Lending and Help to Buy.

Not only are people getting into debt by buying items with loaned money and credit, people are also paying bills by borrowing money.

Now it is has got to the dangerous situation where nearly nine million people in the UK are estimated to be trapped in a spiral of debt and more alarmingly some of them do not realise what a precarious situation they are in and do not realise they have a serious problem. According to the Centre for Social Justice household debt has doubled despite low interest rates and total UK debt has risen to a peak of £1.4tn. Around 8.8 million people are "over-indebted", meaning they have fallen at least three months behind with their bills in the last six months.

It is not just those on benefits who are in trouble, in fact at 20.2% they make up the smallest group. Nearly one in ten (9.8%) of those with bad debts were identified as people who are working for the first time and one in eight (11.3%) are struggling students. However, almost three-fifths (58%) of those with severe debts were found to be in employment and nearly half (48%) live in their own privately owned home.

Around 3.9 million families do not have enough savings to cover their rent or mortgage for more than one month, and poorer people are 'bearing the brunt of the debt storm'.

So the answer to this growing and dangerous debt problem was  for the government and George Osborne to set up a government guarantee scheme to encourage people to get into more debt by loaning people money they have failed to save, to use as a deposit to obtain a mortgage on a house they cannot afford to buy. The repayments on an average mortgage taken out like this would be around £200 per month more expensive.

The result of this is more people are rushing to get into debt and buying houses they cannot afford and this is causing the housing market to over inflate, yet the government seem to be in total denial about the problems they are creating. The fear has always been if interest rates were to rise, what then? House prices in London have risen sharply by 10% in the past month and are rising rapidly in the south east and now right across the country. It seems that George Osborne and David Cameron have learned nothing from the crash.

Now bank of England Governor Mark Carney has issued a warning to 'homeowners' that they must find a way to pay their mortgages if interest rates rise because they will not be guaranteed a helping hand. BoE figures show that thanks largely to the government's interference in the housing market mortgage approvals hit their highest level since February 2008.

This is like a rerun of the last time the Conservatives were in office between 1979 and 1997. Under Thatcher's Right to buy people were encouraged to buy their council houses and when interest rates started to rise many found they could no longer afford to repay their mortgages or loans secured on the property. Under John Major's government interest rates rose to a frightening 15.9%. John Major then PM said there was nothing the government could do to help those facing eviction for mortgage default.

The government and the BoE have now stopped the government's funding for Lending scheme (FLS) and Carney has called on regulators and lenders to cap the size of mortgages compared to the value of the house - the so called loan to value (LTV).

However, the main instigator encouraging people to get into debt is the government's help to buy scheme (HTB) which has been left in place, under this scheme and phase two of the scheme which recently came in, people can borrow up to £600,000 with a government guaranteed mortgage for 95% of the purchase price.

Yet again the government finds itself in somewhat of an 'omnishambles' as it's own cabinet ministers were confused about the HTB scheme, when under questioning alive on air about the housing bubble  Deputy PM Nick Clegg and later Tory Chairman Grant Shapps both indicated that the Governor of the BoE had the power to veto the help to buy scheme, which forced Mr Carney the Governor to write to Conservative MP Andrew Tyrie Chairman of the Treasury Select Committee denying the BoE Financial Policy Committee (FPC) had any such powers and responsibility for HTB lies solely with the Government.

The BoE also revealed new research showing that households with loan-to-income ratios greater than five now account for around a fifth of the total mortgage debt, in the latest sign of overheating in the housing market.

How long can this situation continue before interest rates rise? What happens if the chancellor is forced to cancel the help to buy schemes as well as the FLS?

All this points to an unbalanced 'recovery', if it can be called a recovery at all.

In a post on this blog on November 17th I pointed to eight worrying factors which I believe were showing that the so called British economic recovery is  not all it is made out to be. Exports it tr urns out had fallen sharply by a worrying 2.1%. yet again i pointed out the perils of HTB and at that time Mark Carney was saying nothing, yet one week later he is falling into line with what a lot of people are now pointing out.

What Mark Carney did not say last week was eight important and worrying factors with the UK economy

  1. Retail sales fell by a surprise 0.7% in October 
  2. Fall in exports and rising imports widening trade gap 
  3. Manufacturing growth spurt fails to offset bad year for Britain's factories  
  4. Credit card debt rising 
  5. Use of payday loan companies rising 
  6. Personal debt is rising and threatening recovery
  7. [George Osborne's politically motivated] Housing Bubble
  8. And the true numbers of unemployed is being masked.

There may well be a pick up in retail over the Christmas and January sales period,  but if thus is fueled by credit and debt this will only harm the economy in the long run.

I still remain very concerned that if Mark Carney tries to raise interest rates on the back of false falls in unemployment reaching the magical 7%, this country will be hit with the equivalent of a financial tsunami!

What I fail to understand is why so many journalists seem to have swallowed hook, line and sinker the line that the economy is looking up when it so obviously isn't.

Meanwhile the government does absolutely nothing about the 'cost of living crisis', cost of energy, food, in fact the Government have exacerbated the situation by helping to drive wages down and keep them down.

Whatever happens I believe this country will be back in recession, that is not an if, it is a when and it happens each and every time the Tories are in power - "Tory boom and bust", they never learn, only this time when it happens the consequences will be as bad as, if not worse than 2008 intentional banking crash and global recession. it is absolute insanity to encourage people to take out loans and mortgages they cannot afford, if interest rates rise they could find themselves in negative equity and the whole crazy housing cycle will be off again - thanks to George Osborne. he doesn't exactly instill confidence, every single aim he has set himself he has failed, "judge me on keeping the triple A credit rating" he said and he promptly lost both main ones and several minor ones. He has borrowed more in three years than Labour did in their entire thirteen years and the whole thing is underpinned by 'falling unemployment' which is not falling, it is most likely rising. if the magic 7% figure is reached and Mark Carney fails to increase interest rates, then we all will know why!

George Osborne and David Cameron have panicked when they saw that the economy was not going to pick up without a stimulus so Osborne invented his ready made housing bubble in the shape of 'Help To Buy', this will give a quick fix, but this is all it will give.

Question is will it last beyond the 2015 general election and will the wary British public fall for government lies?

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