With The Nation In Debt What Is The Likely Impact On Landlords?
http://www.rentmanagement.co.uk/articles/752/1/With-The-Nation-In-Debt-What-Is-The-Likely-Impact-On-Landlords/Page1.html
Rent Collection Solicitor
The Rent Collection Service from R. James Hutcheon Solicitors is a low cost rent collection and landlords legal protection service for private residential landlords in the UK. By Rent Collection Solicitor
Published on 11/07/2008
Should landlords be worried about he ability of their tenants to meet rent payments in the light of the downturn of the UK economy and the all time high levels of consumer debt? In a word - absolutely.
With The Nation In Debt What Is The Likely Impact On Landlords?
For 10 years, individuals, companies and the public sector have all been living on credit, going still deeper into the red. Meanwhile, as a nation, we're saving less of our income than at any time since the 1950s. Amid government inertia and misguided intervention by the Bank of England, the day of reckoning is approaching, says Phillip Blond.
Gordon Brown has campaigned forcefully for a 100 per cent write-off for Third World debt. Yet, while cancelling foreign loans, he has presided over an unprecedented 10-year explosion in domestic debt.
In Britain, personal, household and company debt has risen to extraordinary levels, while public-sector borrowing is now approaching the historic highs of the 1980s.
Total UK personal debt (including secured and unsecured lending) at the end of May stood at £1,443bn, 8 per cent up on the previous 12 months. Every five minutes, UK personal debt grows by £1m, a daily increase of £288m. That this is unsustainable is evinced by the rise in court action by creditors against indebted individuals. The number of county court judgments is at a 10-year high, with a total of 247,187 consumer debt-related CCJs being issued in the first three months of this year. Litigation over mortgage debt is similarly up. During the first quarter of 2008, there were 38,688 mortgage possession claims issued on a seasonally adjusted basis, 16 per cent higher than in the first quarter of 2007. These difficulties extend to the rented sector, where 37,221 landlord possession claims were issued and 28,503 landlord possession orders made.
The UK's overall household debt sits at 109 per cent of GDP – the highest of the big five Western European countries and the highest in the G7. What this means is that, as a country, we borrow more than we earn. This line was crossed last year when, for the first time, our debt burden exceeded our GDP. In 2007, it took us until 5 January 2008 to pay off the debt we had accrued during the year. In 1997, "debt freedom day" fell on 23 August in the same year. This year, it is likely to extend well into 2009. Recent levels of the household debt-service ratio (interest payments plus repayments of mortgage principal) are, in the first quarter of 2008, up to 13.5 per cent, the highest since 1991.
And it is not as if people have much to fall back on. Shockingly, figures released last month by the Office for National Statistics show that the household savings ratio – a measure of the take-home pay we save – has dropped to 3.1, so low that we have to go back to 1959 (which had a rate of 1.5) to find a worse situation. Even more worrying, the first quarter of 2008 saw the rate drop even further to 1.1. And this development is not just restricted to households: the UK's overall national savings rate (that of companies, households and the Government) is the second lowest in the G7 and has fallen by more than any other G7 country in the past five years.
The corporate sector is, if anything, more financially extended than the domestic. Ordinary British non-finance companies have a debt-GDP ratio of 123 per cent, the highest among the "big five" in Western Europe. What is more, their ratio of interest payments to profits, at 28 per cent, is approaching the 1990s peak of 31 per cent. Perhaps unsurprisingly, the most extended companies are financial firms other than banks (hedge funds, private equity, wholesale mortgage lenders, etc).
As Michael Saunders, an economist at Citigroup, remarks: "There has been an even more eye-popping rise in debt among non-bank financial companies." Mr Saunders points out that aggregate debt for these companies has risen from £580bn (68 per cent of GDP) 10 years ago to £2,427bn (171 per cent of GDP) at the end of the first quarter of 2008. The comparable average for the euro area was only 32 per cent at the end of 2006. Clearly, this cannot last. As Mr Saunders says: "The debt pyramid has begun to unwind, as has the belief that leverage is the route to prosperity."
And there is not much point looking to the Government for assistance, as public finances are not exactly in a healthy state either. Public-sector debt is climbing steadily – and with a current deficit of 2.8 per cent might even breach the 3 per cent Maastricht limit. At the end of December 2007, general government debt had risen to £618.8bn, equivalent to 43.8 per cent of GDP, whereas public-sector net debt, expressed as a percentage of GDP, was 37.2 per cent at the end of May 2008, compared with its most recent low of 29 per cent in March 2002.
So where will it all end? Well, for many, in very real financial disaster. Likewise, many companies will face increasing difficulties, and the number of those going into administration (up 54 per cent in the first quarter of 2008) and receivership (up 85 per cent, ditto) will rise. Given that 72.8 per cent of British companies are sole traders, their difficulties soon translate into serious issues for households. And it is people's housing that is most at risk, which in turn most imperils the British economy.
Last year, 27,100 properties were repossessed; the latest estimates for 2008 have already reached 45,000. Other indications are that it could get much worse. The Council of Mortgage Lenders estimates that there will be 170,000 mortgages with arrears greater than three months by the end of the year. According to the charity Shelter, 400,000 households are already falling behind with mortgage or rent.
Before this slow-moving consumer car wreck, New Labour has thrown its hands in the air, repeated its arcane faith in markets, and done precisely nothing. Indeed, the Bank of England, determined to fight the next war with the tactics of the last one, has bizarrely decided inflation is the primary issue and that it will be able to control international commodity price increases by suppressing domestic demand. The trouble is that if the Bank succeeds in restricting our domestic spend, it risks plunging Britain into outright economic meltdown. Why? Because the real risk is not inflation, but deflation.
And deflation is worse – much worse – than inflation. In a deflationary economy, prices are constantly falling. If prices fall, profit falls; if profit falls, then growth drops and unemployment rises. This produces a vicious circle of increasing productive capacity, falling demand, falling prices, lay-offs and negative growth. And this is a possible mid-term scenario for the UK.
The highly respected Bank for International Settlements has already denounced the Anglo-Saxon credit economies and explicitly warned of the dangers of long-term deflation brought about by unpayable debt. Indeed, the Great Depression of 1929 was, in part, caused by the tightening of monetary policy intended to prick the speculative bubble of the "Roaring Twenties". Likewise, Japan in the 1990s tried to stem a property and asset boom by raising interest rates, which again were too high for too long; the result has been 18 years of deflationary stagnation.
Thus, the credit crunch, allied with the demand to reduce wages and raise interest rates, could tip the UK into a deflationary debt spiral. Quite simply, if the tightening continues, people won't be able to pay their bills. Given the levels of debt that the credit boom of the past 10 years has produced, any widespread default could bring down the entire financial edifice. After all, this is exactly what happened in the US sub-prime disaster, when interest rates on the mortgages of low-income households were suddenly jacked up to levels they simply couldn't afford to pay. Our own housing sector is now poised on a similar cliff edge.
In short, we need a reversal of policy. Instead of looking on glumly as the disaster unfolds, we should be enabling households to meet their obligations. We need to construct a more radical version of the anti-foreclosure legislation currently before the US Congress – and prevent mortgage lenders from repossessing properties and, in any subsequent sell-off, driving asset prices still lower.
Likewise, help is needed for the millions of indebted and credit-impaired Britons. Since they are, like the Third World, enslaved by unpayable debt, an extensive programme of debt forgiveness and freezing of interest is required.
On a macroeconomic level, it is a matter of choosing the least-worst option. Loosening fiscal policy until international price inflation bleeds out of the system at least keeps the whole ship afloat. Focusing on inflation now risks sending us all to the bottom. Domestic inflation is a danger that can be tackled later – now we have to lessen the debt burden (currently at 173 per cent of household income) and help people pay their bills.
Phillip Blond is a senior lecturer at the University of Cumbria
With the mortgage market in crisis and house prices falling, putting up interest rates to keep a lid on inflation will only tip the UK economy into deep recession, says Graham Turner. As the next election gets closer, Labour may not be able to afford an independent central bank
You don't have to be an economist to know that the UK is edging ever closer to a recession. A profit warning from Marks & Spencer and the prospect of the construction company Taylor Wimpey heading for default were two of the more dramatic headlines in another grim week for Gordon Brown.
It will only get worse, because the Bank of England is reacting dogmatically to the unprece-dented energy and food price shock, and ignoring a collapse of the housing market.
Followers of the oil industry have been warning for years that the world has used up much of the easy and cheap supply of crude. Global production peaked way back in May 2005 and supply problems may send prices still higher as the world heads into recession. Saudi Arabia does not have the reserves it claims and the world's largest producer, Russia, has seen its production peak too. Aside from Iraq, few other countries are able to step in and fill the void; in many, such as Norway, the US, Mexico and the UK, output continues to fall rapidly.
A further surge in crude will put more pressure on food prices, as corn is siphoned off into ethanol to keep US cars on the road. As corn prices soar, so the effect ricochets around the global food chain. Headline inflation may indeed accelerate. We are witnessing the inevitable consequence of a blinkered, short-termist energy policy – namely a failure to develop alternatives to fossil fuels.
But the Bank of England is compounding this folly by threatening to drive the UK economy deep into recession. More banks will share the fate of Northern Rock if the Bank does not abandon its threat to raise interest rates. With the honourable exception of David Blanchflower, the Monetary Policy Committee seems oblivious to the risks.
Mortgage demand collapsed in May when approvals fell from 58,000 to 42,000, a record decline of 27.6 per cent. As the turmoil of recent weeks shows, the markets are turning against the banks, and the tough monetary stance of the MPC isn't helping. It is becoming difficult for banks to raise fresh capital, and they will be forced to push mortgage rates even higher to increase their loan- loss reserves, so driving down demand for home loans and sending house prices tumbling faster. It is the ultimate vicious circle. Before long, the banks will be coming back to the markets cap in hand, searching for yet more capital. Next time, the markets may say no.
Any central banker who believes the current surge in en-ergy costs will become "embedded" clearly does not understand the way globalisation has destroyed the bargaining power of ordinary workers. Wages are not going up, not in the UK, the US or even euroland. Last week, the analysts IDS reported a fall in wage settlements even as headline inflation rose. Many workers cannot afford to go on strike and are fearful of losing their homes should they get behind with their repayments. Real incomes are being squeezed hard.
And that is already having an impact on inflationary pressures. The retail sales deflator is still falling, down 0.3 per cent year-on-year in May. It is a different measure of inflation on the high street – one that takes into account changing shopping patterns. Marks & Spencer's sales collapsed because shoppers are heading for discount stores – food being a good example. The consumer price index shows food prices rose 8.7 per cent year-on-year in May. But the retail sales deflator was up less than half that, by 4.1 per cent year-on-year. Call it the Lidl effect.
So inflation may well continue to rise. But with wages dormant, the "second-round" effects will be constrained. There is plenty of room to cut interest rates. And unless rates fall now, the slide in house prices will accelerate.
But the Bank of England is digging in. It may even hike the cost of borrowing, following the European Central Bank's perverse action last week in pushing rates up from 4.0 to 4.25 per cent. Unemployment in Spain has risen by a quarter of a million in three months as a result of the downturn in its housing market. Retail spending has collapsed. But the ECB ploughed on regardless.
The Government needs to decide whether an independent central bank is worth the political price – the loss of perhaps 200 or more Labour MPs at the next election. If the Bank of England refuses to cut interest rates, the Treasury should assume control of monetary policy. Otherwise, the collapse of Northern Rock may become a template for more banks.
Gordon Brown has campaigned forcefully for a 100 per cent write-off for Third World debt. Yet, while cancelling foreign loans, he has presided over an unprecedented 10-year explosion in domestic debt.
In Britain, personal, household and company debt has risen to extraordinary levels, while public-sector borrowing is now approaching the historic highs of the 1980s.
Total UK personal debt (including secured and unsecured lending) at the end of May stood at £1,443bn, 8 per cent up on the previous 12 months. Every five minutes, UK personal debt grows by £1m, a daily increase of £288m. That this is unsustainable is evinced by the rise in court action by creditors against indebted individuals. The number of county court judgments is at a 10-year high, with a total of 247,187 consumer debt-related CCJs being issued in the first three months of this year. Litigation over mortgage debt is similarly up. During the first quarter of 2008, there were 38,688 mortgage possession claims issued on a seasonally adjusted basis, 16 per cent higher than in the first quarter of 2007. These difficulties extend to the rented sector, where 37,221 landlord possession claims were issued and 28,503 landlord possession orders made.
The UK's overall household debt sits at 109 per cent of GDP – the highest of the big five Western European countries and the highest in the G7. What this means is that, as a country, we borrow more than we earn. This line was crossed last year when, for the first time, our debt burden exceeded our GDP. In 2007, it took us until 5 January 2008 to pay off the debt we had accrued during the year. In 1997, "debt freedom day" fell on 23 August in the same year. This year, it is likely to extend well into 2009. Recent levels of the household debt-service ratio (interest payments plus repayments of mortgage principal) are, in the first quarter of 2008, up to 13.5 per cent, the highest since 1991.
And it is not as if people have much to fall back on. Shockingly, figures released last month by the Office for National Statistics show that the household savings ratio – a measure of the take-home pay we save – has dropped to 3.1, so low that we have to go back to 1959 (which had a rate of 1.5) to find a worse situation. Even more worrying, the first quarter of 2008 saw the rate drop even further to 1.1. And this development is not just restricted to households: the UK's overall national savings rate (that of companies, households and the Government) is the second lowest in the G7 and has fallen by more than any other G7 country in the past five years.
The corporate sector is, if anything, more financially extended than the domestic. Ordinary British non-finance companies have a debt-GDP ratio of 123 per cent, the highest among the "big five" in Western Europe. What is more, their ratio of interest payments to profits, at 28 per cent, is approaching the 1990s peak of 31 per cent. Perhaps unsurprisingly, the most extended companies are financial firms other than banks (hedge funds, private equity, wholesale mortgage lenders, etc).
As Michael Saunders, an economist at Citigroup, remarks: "There has been an even more eye-popping rise in debt among non-bank financial companies." Mr Saunders points out that aggregate debt for these companies has risen from £580bn (68 per cent of GDP) 10 years ago to £2,427bn (171 per cent of GDP) at the end of the first quarter of 2008. The comparable average for the euro area was only 32 per cent at the end of 2006. Clearly, this cannot last. As Mr Saunders says: "The debt pyramid has begun to unwind, as has the belief that leverage is the route to prosperity."
And there is not much point looking to the Government for assistance, as public finances are not exactly in a healthy state either. Public-sector debt is climbing steadily – and with a current deficit of 2.8 per cent might even breach the 3 per cent Maastricht limit. At the end of December 2007, general government debt had risen to £618.8bn, equivalent to 43.8 per cent of GDP, whereas public-sector net debt, expressed as a percentage of GDP, was 37.2 per cent at the end of May 2008, compared with its most recent low of 29 per cent in March 2002.
So where will it all end? Well, for many, in very real financial disaster. Likewise, many companies will face increasing difficulties, and the number of those going into administration (up 54 per cent in the first quarter of 2008) and receivership (up 85 per cent, ditto) will rise. Given that 72.8 per cent of British companies are sole traders, their difficulties soon translate into serious issues for households. And it is people's housing that is most at risk, which in turn most imperils the British economy.
Last year, 27,100 properties were repossessed; the latest estimates for 2008 have already reached 45,000. Other indications are that it could get much worse. The Council of Mortgage Lenders estimates that there will be 170,000 mortgages with arrears greater than three months by the end of the year. According to the charity Shelter, 400,000 households are already falling behind with mortgage or rent.
Before this slow-moving consumer car wreck, New Labour has thrown its hands in the air, repeated its arcane faith in markets, and done precisely nothing. Indeed, the Bank of England, determined to fight the next war with the tactics of the last one, has bizarrely decided inflation is the primary issue and that it will be able to control international commodity price increases by suppressing domestic demand. The trouble is that if the Bank succeeds in restricting our domestic spend, it risks plunging Britain into outright economic meltdown. Why? Because the real risk is not inflation, but deflation.
And deflation is worse – much worse – than inflation. In a deflationary economy, prices are constantly falling. If prices fall, profit falls; if profit falls, then growth drops and unemployment rises. This produces a vicious circle of increasing productive capacity, falling demand, falling prices, lay-offs and negative growth. And this is a possible mid-term scenario for the UK.
The highly respected Bank for International Settlements has already denounced the Anglo-Saxon credit economies and explicitly warned of the dangers of long-term deflation brought about by unpayable debt. Indeed, the Great Depression of 1929 was, in part, caused by the tightening of monetary policy intended to prick the speculative bubble of the "Roaring Twenties". Likewise, Japan in the 1990s tried to stem a property and asset boom by raising interest rates, which again were too high for too long; the result has been 18 years of deflationary stagnation.
Thus, the credit crunch, allied with the demand to reduce wages and raise interest rates, could tip the UK into a deflationary debt spiral. Quite simply, if the tightening continues, people won't be able to pay their bills. Given the levels of debt that the credit boom of the past 10 years has produced, any widespread default could bring down the entire financial edifice. After all, this is exactly what happened in the US sub-prime disaster, when interest rates on the mortgages of low-income households were suddenly jacked up to levels they simply couldn't afford to pay. Our own housing sector is now poised on a similar cliff edge.
In short, we need a reversal of policy. Instead of looking on glumly as the disaster unfolds, we should be enabling households to meet their obligations. We need to construct a more radical version of the anti-foreclosure legislation currently before the US Congress – and prevent mortgage lenders from repossessing properties and, in any subsequent sell-off, driving asset prices still lower.
Likewise, help is needed for the millions of indebted and credit-impaired Britons. Since they are, like the Third World, enslaved by unpayable debt, an extensive programme of debt forgiveness and freezing of interest is required.
On a macroeconomic level, it is a matter of choosing the least-worst option. Loosening fiscal policy until international price inflation bleeds out of the system at least keeps the whole ship afloat. Focusing on inflation now risks sending us all to the bottom. Domestic inflation is a danger that can be tackled later – now we have to lessen the debt burden (currently at 173 per cent of household income) and help people pay their bills.
Phillip Blond is a senior lecturer at the University of Cumbria
With the mortgage market in crisis and house prices falling, putting up interest rates to keep a lid on inflation will only tip the UK economy into deep recession, says Graham Turner. As the next election gets closer, Labour may not be able to afford an independent central bank
You don't have to be an economist to know that the UK is edging ever closer to a recession. A profit warning from Marks & Spencer and the prospect of the construction company Taylor Wimpey heading for default were two of the more dramatic headlines in another grim week for Gordon Brown.
It will only get worse, because the Bank of England is reacting dogmatically to the unprece-dented energy and food price shock, and ignoring a collapse of the housing market.
Followers of the oil industry have been warning for years that the world has used up much of the easy and cheap supply of crude. Global production peaked way back in May 2005 and supply problems may send prices still higher as the world heads into recession. Saudi Arabia does not have the reserves it claims and the world's largest producer, Russia, has seen its production peak too. Aside from Iraq, few other countries are able to step in and fill the void; in many, such as Norway, the US, Mexico and the UK, output continues to fall rapidly.
A further surge in crude will put more pressure on food prices, as corn is siphoned off into ethanol to keep US cars on the road. As corn prices soar, so the effect ricochets around the global food chain. Headline inflation may indeed accelerate. We are witnessing the inevitable consequence of a blinkered, short-termist energy policy – namely a failure to develop alternatives to fossil fuels.
But the Bank of England is compounding this folly by threatening to drive the UK economy deep into recession. More banks will share the fate of Northern Rock if the Bank does not abandon its threat to raise interest rates. With the honourable exception of David Blanchflower, the Monetary Policy Committee seems oblivious to the risks.
Mortgage demand collapsed in May when approvals fell from 58,000 to 42,000, a record decline of 27.6 per cent. As the turmoil of recent weeks shows, the markets are turning against the banks, and the tough monetary stance of the MPC isn't helping. It is becoming difficult for banks to raise fresh capital, and they will be forced to push mortgage rates even higher to increase their loan- loss reserves, so driving down demand for home loans and sending house prices tumbling faster. It is the ultimate vicious circle. Before long, the banks will be coming back to the markets cap in hand, searching for yet more capital. Next time, the markets may say no.
Any central banker who believes the current surge in en-ergy costs will become "embedded" clearly does not understand the way globalisation has destroyed the bargaining power of ordinary workers. Wages are not going up, not in the UK, the US or even euroland. Last week, the analysts IDS reported a fall in wage settlements even as headline inflation rose. Many workers cannot afford to go on strike and are fearful of losing their homes should they get behind with their repayments. Real incomes are being squeezed hard.
And that is already having an impact on inflationary pressures. The retail sales deflator is still falling, down 0.3 per cent year-on-year in May. It is a different measure of inflation on the high street – one that takes into account changing shopping patterns. Marks & Spencer's sales collapsed because shoppers are heading for discount stores – food being a good example. The consumer price index shows food prices rose 8.7 per cent year-on-year in May. But the retail sales deflator was up less than half that, by 4.1 per cent year-on-year. Call it the Lidl effect.
So inflation may well continue to rise. But with wages dormant, the "second-round" effects will be constrained. There is plenty of room to cut interest rates. And unless rates fall now, the slide in house prices will accelerate.
But the Bank of England is digging in. It may even hike the cost of borrowing, following the European Central Bank's perverse action last week in pushing rates up from 4.0 to 4.25 per cent. Unemployment in Spain has risen by a quarter of a million in three months as a result of the downturn in its housing market. Retail spending has collapsed. But the ECB ploughed on regardless.
The Government needs to decide whether an independent central bank is worth the political price – the loss of perhaps 200 or more Labour MPs at the next election. If the Bank of England refuses to cut interest rates, the Treasury should assume control of monetary policy. Otherwise, the collapse of Northern Rock may become a template for more banks.