CONUNDRUM
Posted on August 23, 2006 by Steve
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Conundrum
Read the papers – any paper – and what message is flavour of the month? Debt. Personal, horrible, immense and growing debt. And don’t just believe the papers; they all back up their Cassandra like prophesies with Government statistics. As one they scream; “Britons drowning in debt”, “Savings ratio at lowest for decades”, “Energy prices up 47% in a year”, “Disposable incomes falling rapidly”, “House prices rising at record rate” – Er, sorry, what was that last one? If we are all spending money we haven’t got, on things we don’t need whilst we face hypothermia next winter because we can’t buy enough faggots to keep the ice at bay how can houses be increasing in value? Especially if we are not saving enough for even the paltry deposits that the mortgage companies want. Something is wrong here.
What is wrong, I believe, is that the government have finally begun to believe their own spin. First they remove themselves from the real world by measuring inflation by the CPI index, a cunningly crafted measure which carefully ignores things the rest of us have to pay regularly – like mortgage payments. They then give extra weight to items which are genuinely falling in cost, like white goods, over things we all use daily, like energy. I don’t know about you, but I buy a fridge perhaps once every 4 or 5 years. I pay for my energy monthly, energy which I have seen rise in price by about 50% since the beginning of last year but which, funny old thing, government statisticians claim has only gone up by 17%.
It’s the same story with the savings ratio. People are not stupid; put £10,000 in a typical deposit account and, even if you can get a 5% rate (unlikely), by the time you’ve paid the tax, then left enough in there to cater for the ravages of inflation on the value of your money you will be lucky to get a real rate of return of 1%. So people turn to other investments. Those with money borrow cheaply, buy houses and let them to those who can’t save enough to buy their own. They also buy fine wine, works of art or land in Bulgaria. OK, these latter might be iffy (including the bubble that is the buy to let market) but they exhibit two characteristics which government bean counters don’t like. They are real and they can’t be easily measured. So they fall back on the “Drowning in debt” mantra which fits one half of a pattern that they can, dimly, see.
As a result on the one hand we see price rises being measured in such a way as to minimise them, whilst on the other money flows such as credit card spend and how much we are (or, more importantly, are not) saving are being anxiously counted each month by the Whitehall statisticians. Result, panic, doom and gloom and a rush for a palliative policy before the next election.
Why should we care? Because these flawed statistics, sound bite assumptions public perceptions and overall very distorted views of what is happening in the economy become the basis of government policies aimed at tackling perceived situations which, on close examination are not what they seem. Sure, lots of people have big debts; but lots also have surplus equity – especially the post war baby boomers whose parents are now dying and leaving them lots of dosh in the form of houses etc.
Governments may decide to ignore reality; markets don’t. If the housing market is going up it is because people have the ability to pay for the houses they are buying. Some may have to sacrifice other spending – e.g. on holidays – to do this but many won’t. A government which only counts half of this equation and then thinks is has found the value of x as a result is heading for a fall that will be very expensive – for us, the taxpayers.
The lunatics finally have the key to the madhouse and the truly sad thing is that those waiting in the wings to take over don’t have certificates of sanity either.
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15 Responses to “CONUNDRUM”
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I love the anlaysis, especially as it means we’re richer than we thought we were. But I can’t help thinking the next generation, and the one after that are going to find things a lot tougher - especially those whose baby boomer parents didn’t cash in, or retired early and frittered away their money on posh cruises. I guess my kids will have to wait for house prices to collapse once the baby boomer generation (and attendant bubble) has been and gone. Either that or it’s going to be a lean decade for Daddy!
Oh - and you need to find a better make of fridge
I agree that the measures of inflation have been manipulated downwards for decades. In fact, it would be amazing if they did anything else. Moral of story do not buy any index-linked investments gilts or National Savings. Unfortunately Pension funds have to buy some in order to keep the actuaries happy. HMG managed to manipulate this in order to keep the financing costs of its debt down. The effect was to produce company pensions with a big mismatch between liabilities and income, well done Gordon.
Incidentally, Thatcher achieved the same effect on local goverment pension funding in 1990 in an attempt to make the ‘Poll Tax’ palatable. In that case it was not fully funding the local government pension funds
This government has been confused by its own spin to the point where it does not know what to believe. Some of us really are wealthier - especially those in their fifties and sixties who have pensions linked to their salaries. But spare a thought for those in their twenties in the private sector. They will not have pensions linked to salaries, thanks to Brown’s raid on pensions in 1997.
So, those now in their twenties must save more for their own pensions while simultaneously trying to fund mortgages for houses being bought at record levels compared with incomes. And, they will also have to fund the bloated (thanks to Brown) public sector pensions that are linked to salaries.
Of course those now in their fifties might be able to pass their money to their children - but not for another 30/40 years - and Brown has thought of that too by increasing the impact of inheritance tax.
History will show that Brown and his accolyte have done more to balls up the English economy than any government since Attlee. Unfortunately it will need the perspective of time for the truth to emerge from the fog of spin and corrupt statistics that they insidiously promote.
agree with much that has been said,especially concerning lunatics,madhouse and the other lot not having certificates of sanity.As a dad in his late 50’s I feel sorry for the young people who have been priced out of the housing market and I am also fearful for those who have taken the gamble of accepting mortgages based on vast income multiples.I believe current house prices are unsustainable.If first time buyers are virtually frozen out,I believe it will only be a matter of time before prices head south.
I enjoyed reading your article, but I would like to illustrate how easy it is abuse statistics, even if it is with good intentions (ie bashing the government). In your article you wrote:
“I pay for my energy monthly, energy which I have seen rise in price by about 50% since the beginning of last year but which, funny old thing, government statisticians claim has only gone up by 17%.”
Inflation is an annualised figure so your 50% energy price inflation actually needs to be adjusted for the fact that you are comparing prices today to those 20 months ago. If we assume steady inflation month by month, your energy prices have gone up by about 30% in the past year, still worse than the government’s estimate of 17%, but not as severe as the 50% figure you used.
Agree with your comments on inflation, however I disagree with your conclusion. We are not better off than we think. We are a nation of shoppers rather than shop-keepers. Rising house prices are what has kept the ecconomy afloat. As a nation we remortgage to fuel our addiction to spending. Britain currently has more credit card debt than the rest of Europe put together!
With low interest rates and remortgaging we do not have as much savings as we should and debt is high and rising. Reports today show that the last rate rise has not dampened the enthusiasm to shop with consumer spending up for August. To prevent this continuing further rate rises are likely.
Inflation may be currently artificially low but it is also low due to supermarket competition and cheap imports, neither of these can last much longer. With fuel bills on the increase and China (amongst others) having increased wages the cheaper products are in decline.
We may percieve ourselves to be wealthy as we have made £50k on our house value, however like shares it is only real money when it is cashed in.
If interest rates rise and we are unable to pay the mortgages then there will come a point when people are forced to sell. Also 60% of retirees savings are in their house value. So a decrease in house prices may see a lot of people rushing for the doors to save their retirement plans.
If (when) house prices start to fall the whole ecconomy could come down like a pack of cards.
Of course historically houses are not unaffordable. Expectations are too high amongst first time buyers.They can survive without a property fully furnished and upto the minute specification. Also because interest rates are so low it is not the repayment of loans that it is difficult. The problem is the rigidity of lenders who should be coming up with schemes which allow their participation in equity growth to allow sufficient cash to be advanced. most young couples in joint employment can afford £150-250 per week rent. This will finance a loan of between 150k and 300k at current rates - sufficient for a property in any region of UK. Of course a new starter living by himself cant afford this - but historically they never have.
More importantly it is the destruction of the earnings related private pension by this Government that is their legacy. The UK system has been the envy of the world for decades. It was destroyed by the tax raid of Gordon Brown but more recently the unnecessary need for funds to hold gilts instead of equities at ridiculously low returns. Unfortunately as most schemes are now closed to new members this onerous requirement increases every year as the schemes matue. This has a secondary effect of pulling more and more funds from the sponsoring companies and has in fact become a greater drag than corporation tax in many companies. This affects investment and creates unemployment which eventually lowers the benefit of the original tax grab.
Glad I seem to have stimulated a dialogue.
My main poiint is that, by refusing to accept that ordinary people face price hikes in everyday expenditure by measuring inflation and other financial basics in a badly skewed androsy eyed pro government - line way, the very government that must plan for the future rsks doing so on the basis of seriously flawed information.
The situation is made more complex by the fact that they - and most of the media - continue to speak in broad, “average” terms by implying that the mean price of a house is now $167,000 - it may be in london, doubt if it is in Hartlepoole. They then try to put in place “average” policies that help some, hinder others and are irrelevant for many - but costly, in tax terms, for us all.
We should care becasue it is idealogically driven drivel like this that drives Gordon Brown - arguably the worst chancellor in history -to raid the pension funds he then lambasts us for not supporting with more payments - could it be that, like all socialists, his envy of the “wealthy” is such that he never believes facts that are inconvenient for his particular views? Rather like the comminists and fascists, I suspect that the Brownites are so convinced that theirs is the only correct view that they will, in full power, shout down the voices of reason that still do exist in what used to be the LABOUR party.
Shudder all ye of little wealth and current comfort, winter is coming, its name is Brown and it’s going to be a hard one.
Oh, please, Gentlemen. If you are Baby Boomers you will remember that nobody has ever before expected to leave uni, meet The One Forever and immediately buy a high quality house/flat in a good neighbourhood, filling it with the entire stock from Ikea. This is after spending £15k on a wedding, as well as a good car, a honeymoon in Barbados and clubbing every weekend.
How many of us started renting a grotty flat, saved, borrowed the deposit on a tiny house miles away from work and knew we were doing very well.
Our children’s expectations are extreme and newspapers and magazines fuel their ideas of “necessities”. My son in law has just been out and bought a satnav, absolutely essential, he says, and is complaining about the interest rate he is paying for it. The idea of not buying it didn’t occur to him.
What have we done to create a generation of must have, got to haves? It must be our fault - everything else is.
In response too annie:
I agree with one aspect of your comment - that there is a ‘must have’ lifestyle now. But by accepting that fact does not mean that you can simply ignore the realities of the housing market. In other words, just because ppl are spending more on holidays, clothes, whatever, does not by implication mean there can be no affordability problem with the housing market for different reasons.
For instance, if your son in law had not bought the satnav (circa £300?) would this really help him onto the housing market?? You need 30K apparently to start on the market, i reckon the frugal among us could live with 25K. 10% deposit of 150K (average 150K starting 1 bed around south east) gives uk 15K, stamp duty and legal fees and the conning estate agents add another 5K, and I am sure it is right to suggest another 5K to buy seats, fridge, tables etc for the new house that would have been supplied during rental. Saving £200 a month would take abour 5 yrs to get a deposit, in which time the housing market will have gone up another 50% (assuming roughly 1% per month increase) so i have to save another 2 years and so on.
150K gets me a 1 bed, average standard flat, in council like block of flats in Reading. No where to park, no garden, and miles away from where i work. My parents were never well off yet they agree they had a better standard when they were younger.
I am a engineering graduate who has been 6 yrs into work, had average pay rises due to the sector, run a cheap 10yr old car, dont go near town centres and hardly ever go out,yet my monthly expendeture is close to 1K a month just to pay the bills (350 rent, 100 bills, 200 fuel, 150 food, mobile and car insurance 100, plus whatever other sporadic cost of living seems to crop up month after month). If i save for a pension and a mortage deposit i am still 7 years away where i will be 35. By that time by parents had their 2nd home and 3 children…..
Buy to lets have done it, the reason all these first time buyer places are still being sold and keeping up demand are because investors are buying them up left, right and centre.
Just because ppl buy a few more luxuries than they used too, its lost in the noise compared to the huge increases in the house market. Please do not confuse this.
Eastern european immigrants a providing a strong rental market, so i can see more and more houses being turned into buy too lets and taking more available houses away from us. There will be no BTL saturation due to these immigrants coming in.
The government puts no taxes on buying a 2nd property (unless you sell) so it just goes on and on. But why would they, all cabinet ministers have a large portfolio of buy to lets…..
Just look around you, do the sums,read the papers,watch the news.Of course many young people are priced out of the housing market.Evidence:average age of first time buyer is highest ever,more and more young people are still living at home with their parents,lenders are coming up with more and more ludicrous and risky schemes such as mortgages for 4 or more friends to share.Parents are increasingly mortgaging their own properties to help off-spring onto housing ladder(maybe storing up financial problems later for themselves),introduction of interest only mortgages….I could go on.
Not all young people expect everything on a plate and go spending willy nilly…..many are genuinely having a struggle and are dis-heartened by the situation,believing that they will never save up enough to buy their own modest first home.Have to agree more with Nick than Annie.No wonder average age of mums having their first babies has increased substantially(teenage mums excepted!!)and wow,they then have to think about saving for retirement and/or working until they drop even if they have paid off the mortgage before they retire!!
I,m damn’ pleased it ain’t me,but it does apply to my children.And no, not one sat -nav between us!!
Just look around you, do the sums,read the papers,watch the news.Of course many young people are priced out of the housing market.Evidence:average age of first time buyer is highest ever,more and more young people are still living at home with their parents,lenders are coming up with more and more ludicrous and risky schemes such as mortgages for 4 or more friends to share.Parents are increasingly mortgaging their own properties to help off-spring onto housing ladder(maybe storing up financial problems later for themselves),introduction of interest only mortgages….I could go on.
Not all young people expect everything on a plate and go spending willy nilly…..many are genuinely having a struggle and are dis-heartened by the situation,believing that they will never save up enough to buy their own modest first home.Have to agree more with Nick than Annie.No wonder average age of mums having their first babies has increased substantially(teenage mums excepted!!)and wow,they then have to think about saving for retirement and/or working until they drop even if they have paid off the mortgage before they retire!!
I,m damn’ pleased it ain’t me,but it does apply to my children.And no, not one sat -nav between us!!
Looks like I,ve done a Fred Elliot (R.I.P.)
Sorry Steve, but like so many people you know the price of everything but the value of nothing.
You don’t get richer by borrowing. “Equity withdrawl” is a fancy name for borrowing. With interest.
Ironically, the government is the one telling us we’ve never had it so good. It is Citizens Advice and others who are trying to draw attention to our rising debt mountain.