The ‘R’ word is back. If one were to produce a graph plotting usage of the word “recession” in the media, then right now the graph would be going though the top of the screen. But here is another word for you to try: “relax.” Two reports have been produced recently which appear to show all the fears doing the rounds are overdone.
First there was a report from Barclays Capital looking at these 1.2 million, or so, people who are due to be coming off fixed rate mortgages this year. Now we have said many times that David Smith, economics editor for The Sunday Times, seems to be anxious to win the award of most-optimistic economics journalist of the year. And yesterday he was true to form. In an article headed “A sense of balance on consumer gloom,” he said, “One factor that has been over-hyped is the mortgage ‘re-set’, as people come off existing fixed rate mortgages onto higher ones. According to analysis by Barclays Capital, this is a red herring. The maximum pain from re-sets this year will be £2.1 billion, and the likelihood is of something significantly lower.”
Meanwhile, the Halifax, which by the way also down-played the significance of this impending mortgage re-set throughout most of last year, has just published more data, which no doubt is supposed to reassure us. The Halifax says, “The value of the UK’s private housing stock rose by 9 per cent (nearly £320bn) in 2007 to a record £4.0 trillion (£4,000 billion). The value of the housing stock has more than tripled over the past decade, rising by 208 per cent from £1.3 trillion in 1997. By comparison, the headline retail price index (RPI) has risen by 31 per cent over the past ten years.” And then, finally putting the knife into the pessimists who have been saying we have too much debt, added, “The value of the private housing stock (£4.0 trillion) was 3.4 times the value of outstanding mortgage debt of £1.2 trillion at the end of 2007. Ten years ago, private sector housing assets were 3.0 times higher than mortgage debt. Housing assets have increased by more than mortgage debt levels in each year since 1995.”
What puzzles us a tad abut this Halifax data is this. Presumably, if house prices were to double again, to a level that surely even the most optimistic bull would say is unsustainable, the Halifax logic would suggest the UK is in even better health. In other words, the Halifax report seems to be saying the more the property bubble is inflated, the less likely it is we will suffer a debt problem. Now to our way of thinking, that smacks of upside down logic.
As for the report on mortgage ‘re-sets’, surely the point about all these 1.2 million people coming off fixed rate mortgages is that some will find it a struggle. Some, especially those with poor credit records, will find it impossible to secure a viable mortgage deal. It’s these people at the margin who will be the key. If 90 per cent of individuals with fixed rate mortgage deals coming to an end have no problem at all making ends meet, this is an irrelevance if 10 per cent find they have to sell their homes and downsize. The sale of homes by these 10 per cent would lead to a big jump in the supply of homes for sale, and prices would fall, making the Halifax’s rosy data on our wealth look decidedly, well how can we put it politely, say, non-rosy in a dried-up desert sort of way.
Mind you, there has been some good news creeping into the economic data of late. Since the steps taken by central banks to pump liquidity into the system at the end of last year, the interbank rate has been falling, and the difference been the interbank rate and official rates set by central banks is now barely above average. So hurrah for that. But don’t forget, interbank rates are also supposed to reflect expectations for future changes in bank rate, and since just about everyone is expecting the Fed and Bank of England to lower interest rates this year, maybe the latest news from the interbank market is not quite so good after all.
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