We had more money to spend on living in 2003

July 4, 2008 | posted by Michael Baxter in Distribution of income | comments (0) | Print This Post

Underlying fundamentals are strong.  That’s the reason given for why the current economic crisis will be short-lived.   That’s why the Halifax and Nationwide insist there will be no property crash.    That’s why Gordon Brown and Co think the economy is basically in good shape.  It is just the credit crunch.  Once credit is restored, everything will be fine.

But for people working hard on an average sort of income, things have been getting tougher for some time.   Unemployment might be low, but we didn’t seem to be feeling any better off.

A year ago, Ernst and Young shone a lot of light on the picture.   Back then, it found that the average family had just over 22 per cent of its gross income left over, as opposed to over 28 per cent in 2003.   The report was published before the credit crunch, and did not get the attention it deserved.

But that was then.  It’s a year on, and now our discretionary disposable income, that’s after things such as petrol, council tax, utility bills, rent/mortgage, is at its lowest level in five years.  The average household now has just £772.79 left over, as opposed to £909.84 in 2003/04.

We all know why, council tax, utility bills, and of course food and petrol, have all been soaring.

“All consumers are painfully aware of the huge hikes in petrol and utility bills but we’ve also seen some fairly hefty price increases in pension contributions and debt repayments,” said Jason Gordon, the director of retail at Ernst & Young

He added: “If we go one step further and factor in food price inflation, which official figures have placed at 8.7 per cent in the last year, it’s clear that household budgets are under enormous strain. Add in the impact of falling house prices on the consumer’s propensity to spend, and the consumer economy is undoubtedly on a knife-edge.”

Earlier this week, Bank of England MPC member Charles Bean warned that living standards are expected to fall for another year.

So that’s pretty bad.  The economy may have been booming for five years, but we have not been getting any better off.  Presumably then, the boom was funded by borrowing.

But, if we have less money left over to spend on living, as opposed to surviving, how can there be inflationary pressures?

That is why, in the longer-term, deflation is a danger.  Once oil and food price hikes have worked through the system, we could be left with a nasty shortfall in demand, leading to price falls. 

And that, in the longer-term, is surely the bigger danger.

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We each need £158 a week just to survive

July 2, 2008 | posted by Michael Baxter in Distribution of income | comments (0) | Print This Post

So how much do you need to live on?

If you are a part of a married couple with two chidlers, then it’s £370 a week, after rent, or so says research from the Rowntree Foundation. 

To afford this budget on top of rent, living in a modest council home, the two parents–two children household needs to earn £26,800 a year before tax, according to Rowntree Foundation research, produced after interviewing a cross selection of the public.  

If you are on your own, then you need £158 a week, before rent, meaning you need a salary of £13,400 a year to cover your living expenses and rent.

So what does survival require these days?  Well, for your stereotypical, two parents–two kids, you need, among other things, £97.47 a week for food, £29.26 for clothing, but a whopping £186.98 for child care.  But what about having fun?  The report allocated £90 for what it rather grandly calls social cultural participation, and £6.06 for alcohol.

Rent was put down at £69.40, which assumes the family lives in this modest council home.

For families with no adult working, state benefits provide for less than half the minimum budget for single people and around two-thirds for those with children. The basic state pension provides a retired couple with about three-quarters of the minimum, but if they claim the means-tested Pension Credit their income is topped up to just above the minimum income standard.

The minimum income is above the official “poverty line” of 60 per cent median income, for nearly all household groups. This shows that almost everybody classified as being in poverty has income too low to pay for a standard of living regarded as “adequate.”

Mind you, if you have to drive to work, even if work is no more than a 20-minutes drive, it seems likely petrol alone will be £50 a week.  Car payments, so that’s tax, repairs, and actually paying for the vehicle, must come in at £250 a month.  So that would mean the total cost of travelling to work would add up to another £450 a month.  If you both drive to work and have a similar distance, but don’t work near each other, then total motoring costs would be £900 a month. 

Rent of just £69.40 a week seems very low.  If you were to rent a reasonable house big enough for the four of you, then surely £750 a month is the minimum rent.  So after paying tax, two people with two children who both drive to work may need to earn the £26,800 a year estimated by Rowntree, plus £10,000 a year for paying for cars and petrol, an extra £500 a month for rent, then tax, say £3,000, that is another £19,000.  All of a sudden, it appears that actually, some families, living a pretty frugal life style, will need a joint income of  £45,000.  And that seems quite a lot.  

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Possession is ninth tenth of the law of house price falls

May 12, 2008 | posted by Michael Baxter in House prices | comments (4) | Print This Post

Price is determined by demand and supply and, right now, in the housing market demand is low. But then again, so too is supply.  Builders have been announcing plans to put their current projects on hold, while homeowners are putting off plans to sell their property, or properties.

But then again, sometimes people have to move.     Maybe they have changed jobs and need to move to a new area,  maybe their family is growing and they need more space, maybe they need the money.

The longer the downturn lasts, the less likely it is people will be able to hold on.

And that brings us to the latest figures on possessions.

You won’t be surprised to hear that they weren’t good, but then again, we are still way short of the levels seen in the early 1990s.   In 1991, no less than 75,000 houses were taken into possession.  Contrast that with 2007, which saw just 27,000  taken into possession. Now, for those affected this was a disaster, but many have taken comfort from the fact we are nowhere near the levels of 16 or 17 years ago.

Housing Minister Caroline Flint said: “It is important to recognise we are dealing with an entirely different situation in the market from what was experienced in the early 1990s.

“The fundamentals of the housing market remain strong with high employment, low interest rates, and long-term demand for homes from first-time buyers.”

Property bulls have often cited the relative low number of possessions compared to the early 1990s as evidence that this time it is different.

But what they overlook is that, actually, in times of rising house prices and easily available credit, it is actually quite difficult to get your home re-possessed – you have to be really unlucky.

After all, if you run into difficulties you can just get a top up on your mortgage or, worst case, you sell.    Recent years have seen the emergence of packages in which some companies will buy your property off you, and rent it back; again, this will have helped reduce the overall numbers.

It may be more meaningful to look instead at the number of claims made, and issued.

In 1991, 188,649 claims were issued and 142,095 orders were made.    Of the orders made, just over a half finally led to properties being taken into possession.

In 2007, 137,607 claims were issued, and 95,187 orders were made, but this time less than a third of those properties were actually re-possessed.

On Friday the latest data, this time for Q1 of this year, was out.    40,424 claims were issued, and 26,930 orders were made.   The Ministry of Justice, which publishes these figures, only publishes the number of properties taken into possession on a half-yearly basis, and we will have to wait another three months for that information.

The real concern is this. If the first quarter of this year proves typical – and let’s face it, the economic conditions have been getting a lot worse of late, then this year will see 160,000 possession claims issued, making 2008 the second-worst year since 1990, but intriguingly, 2008 will see only 104,000 orders being made, lower than 1990, 1992, 1992, and 1993.

 possesions

Why is that?

Well, in part, there is always a time lag with these things.  Claims maybe issued, but orders are not made straight away, and the property is only taken into possession down the line.

In part, as we said earlier, high house prices and the easy availability of credit,  gave homeowners other options.

But in the credit crunch of 2008, some of those options are disappearing – certainly it is now a lot harder to just top up your mortgage.   This could explain why recent borrowing figures showed credit card borrowing rising.

More worrying, if the rest of this year proves even worse for claims being issued – and with house prices falling, with wage inflation lagging behind retail price inflation, and with credit becoming so much harder to obtain – it may well do,  then the 1991 record may be broken.

The real tragedy of possessions, however, is what occurs when homeowners have negative equity.

The good news: according to a recent report in the FT, house prices would have to fall by 25 per cent before negative equity rates reached similar levels seen in the early 1990s.    

If house prices were to fall by 15 per cent, that would leave just 0.5 million people with negative equity.    

However, if prices fall by more than 20 per cent, then the number in negative equity rises rapidly.     A 20 per cent fall would mean 1.2 million with negative equity; a 25 per cent fall, 1.8 million; and a 30 per cent fall, 2.5 million.

To find you can’t afford to pay the debt, and at the same time you have negative equity, is a true tragedy.

And it must surely be the fear that this may happen that could drive people to sell. 

PS
One of the hot topics relating to mortgages is PPI insurance.   Lately there has been a media backlash against this type of insurance – suggesting many borrowers have been persuaded to take out schemes they did not need.

Recently, Defaqto, which owns Investment and Business News, has warned this could be very dangerous.    Brian Brown, head of Defaqto Insight team says, “With the economic slowdown, now is surely the time to make sure you are adequately covered from the possibility of losing your job and not being able to repay your mortgage.”

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Lies, damned lies and statistics

May 7, 2008 | posted by Michael Baxter in UK economy | comments (0) | Print This Post

When Philip Green, retail magnate, not to mention richest English national, says conditions on the High Street are the toughest he has ever known, and yet the Office for National Statistics says retail spending grew by 2.6 per cent in the first quarter of this year, who do you believe?

When the Halifax and Nationwide talk about strong economic fundamentals propping up house prices, are you convinced?

When the Treasury, with access to oodles of data, projects a mild slowdown in economic growth this year and next, do you sigh with relief and say, “So that’s all right then”?

For that matter, when Nigel Lawson once claimed that rising interest rates would not lead to a recession, did you think, “Thank you for that Nigel, I was getting worried then, but you put my mind at rest”?

Alternatively, maybe you are a tad more cynical.  Or maybe you buy into the doom and gloom in the media.  But who is right?  Many say the media are talking us into trouble – that actually things are not so bad.  Look at the official data, they say.  But are they right?

In a recent interview on Radio 4, Martin Weale, Director at the National Institute of Economic and Social Research (NIESR) was, how can we put it, disparaging about consumer confidence indices.  He suggested these were virtually meaningless scores.

Talking of NIESR, it recently forecast growth to slow from 3 per cent in 2007 to 1.8 per cent in 2008 and 2009. Now actually, if that forecast is proven right, it will be an impressive performance for the UK.  We are already enjoying our longest ever run of economic growth – by a long way, actually – and so if, during the midst of the worst financial crisis since the 1930s, the economy merely slows down a bit, we should be delighted.

And if that does indeed prove to be the case, then maybe we should all apologise to Gordon Brown, and beg his forgiveness for all those nasty things we have been saying.

Yet, despite all those reasons to be cheerful, the media still fill us with talk of doom. 

The last few hours have seen two reports hit the media trail. The Nationwide has recorded a big fall in consumer confidence, with its index dropping from 77 in March to 70.   To put that in perspective, the index stood at the heady heights of around 110, 40 months ago, but even as recently as last Autumn was only just below 100.   The April score was the lowest yet recorded by the Nationwide, but then, since it has only been capturing the data for four years, maybe we can not read too much into that.

More to the point, last week the consumer confidence index from GfK NOP fell to its lowest level since the early 1990s.

But then again, so what?   What is consumer confidence, exactly?    This is clearly an index that uses no hard data – it is based on opinion – opinion that may be moulded by the press.  So if the press say things are bad, consumer confidence then falls, and the press have even more reason to say things are bad.

But then again, frankly, official data has been lousy at predicting economic downturns.       Nigel Lawson totally failed to foresee the strength of the consumer boom in the late 1980s, and then, when it was too late, slammed on the brakes, denying a recession would result right up to the moment that recession bit harder than a Pit Bull on its dinner.

Maybe the problem then was the official data – it did not take sufficient account of what people were thinking.  Maybe a consumer confidence index would have told Mr Lawson the information he would have required to even-out the cycle.

And that brings us to the other piece of data to hit the media track this morning.

Yesterday, Capital Economics published a report on discretionary income, that is income after spending on items we have little control of in the short-term – mortgage payments/rent, utility bills, cost of travel to work, council tax and food. Its finding: “The share of household income eaten up by unavoidable or fixed outgoings has risen from 25 per cent  to 31 percent over the past 6 years. And there is little hope of this share falling back in the foreseeable future.”

Here is the good news, as rates fall, and banks reluctantly cut rates down the line, Capital Economics says, “We think that mortgage payments as a share of household income will fall from 10.7 per cent to around 10 per cent by the end of 2009.   But, this is likely to be fully offset by further rises in the costs of all other unavoidable outgoings.” 

With oil, food, water and gas all rising fast, it says, “The share of household income left over for discretionary spending looks likely to remain at its lowest level since 1991.”

The Daily Mail, never slow to find a reason to criticize this government, splashed news of the Capital Economics report all over its front page – this will of course help deflate the consumer confidence index by even more.

This is the fourth report we have recorded that has published data of this type over the last year.   But, before you decide there is no hope, bear this in mind.

These non-discretionary items are precisely the types of products that have been rising in price.   Other items, such as clothing, furniture and CDs have been falling in price.   So we may have less money to spend on non-discretionary items, but many of the discretionary items have been falling in price – so the money left over may, theoretically, go further. 

So it comes back to statistics.    Do you believe the retail price index, which supposedly tells the full story, or do you conclude that this index puts insufficient weight on items such as petrol, food and council tax?   

And now it is over to you. 

There is no shortage of statistics, but is it the official or the anecdotal data that tells the lie?

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RICS: biggest dip in key index since 1992

February 13, 2008 | posted by Michael Baxter in House prices | comments (0) | Print This Post

Maybe the Royal Institution of Chartered Surveyors (RICS) produces the most important and significant of all reports into the UK housing market. Its main headline index seems to be the most reliable indicator of what the UK housing market is doing, while it also produces a raft of other measures which seem to give a pretty good indication of where the market will be going next. And this morning the latest set of reports from RICS were out – and they were sorry indeed.

The headline index – which is produced by asking surveyors if prices were up or down in their neck of the woods during the month, and deducting the percentage number who said down from the percentage number who said up, fell to -54.7 in January; that’s the lowest level since 1992.

Now, it is important to bear in mind we have been here before – quite recently. From 2004 to 2005 the RICS index was in negative territory for 15 months, and yet it recovered – went positive in November 2005, and preceded a period of strong house price growth.

Property bulls often cite the slowdown of 2004 and 2005 as evidence of the underlying strength of the market. At the time, they said the market would see a mere slowdown and would then recover – some ridiculed this prognosis, and yet these positive projections proved to be right.

Now transpose that debate on to today’s discussion. The bulls of course point to that time and say we were right then, and the same principle applies now.

Now there is actually a fundamental flaw with that argument. The history of bubbles is riddled with examples of markets that appeared to decline, recovered, seemingly confirming the most bullish of predictions, only for the bubble then to burst later.

But putting that argument aside, it is worth taking a closer look at the 2004 and 2005 RICS data. It is true the RICS headline index was negative for 15 months, and so far it has only been in negative territory for six months – so maybe you could argue it is too early to tell.

But, there are differences. In the previous downturn, the index bottomed out at -46. This time around the RICS index has now put in lower scores than that for two months in a row.

Back in 2004, once the RICS index went negative, it posted declines for four months in succession, before starting to improve – this time, since the index first went negative there have been six months of successive falls.

It is clear then that the indicators suggest this slowdown is much worse than the last one.

rics

But where next?

And it is in indicating what the future will bring that the RICS report paints an especially dismal picture.

For one thing, the RICS index for measuring expected prices fell to the lowest level ever recorded – or 1998, which is when RICS first started including questions about confidence in its survey.

Just as significantly, however, new buyer enquiries also fell in January. In fact, says RICS, “The pace of decline in new buyer enquiries picked up speed in January having shown some signs stabilising in preceding months. The net balance of surveyors reporting a drop in the number of new buyer enquiries now stands at 35 per cent which is the worst reading since October. That (and the September) figures had been dragged down by the fall-out from Northern Rock.”

But, perhaps most damming of all, the stock of unsold property on surveyors’ books jumped by 10.3 per cent on the month. Average stocks on surveyors’ books were 85.0 in January compared to 77.1 in December. On year-ago levels, stocks are up by 33.8 per cent, and the current level of unsold stocks is at its highest since the late 1990s.

Now you don’t need to be a mathematical genius to work out that when demand is falling and inventory levels are high, prices are likely to fall.

But woe on the housing market is not only forthcoming from RICS. Yesterday, the Council of Mortgage Lenders reported that there was a 35 per cent drop in the number of new mortgages in December, and that the last three months of 2007 saw the lowest number of new mortgages since 1995.

Yet, amazingly, the property industry still seems to think there are no major problems.

RICS spokesman, Jeremy Leaf, said, “However, if mortgage lenders filter the recent interest rate cuts into the market, demand should begin to increase. In the near term, the housing market will continue to be shielded from significant price falls while employment conditions are strong. The market need only fear a significant fall in prices if job losses start to multiply.”

CML too were celebrating the recent fall in interest rates, and its director general Michael Coogan said, “The impact of payment shock on the large numbers of borrowers coming to the end of fixed-rate mortgages will also be less than we anticipated last year.”

The property industry seems determined to do its bit in talking house prices up – but the truth is, house prices are too high, wage increases are lagging behind inflation, our discretionary disposable income actually seems to be falling – and as the US experience tells us, unemployment does not have to be high for house prices to fall.

The property industry might think they can keep prices up just by making positive comments – but the reality is, they talked prices far too high in the first place.

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The income lie

February 5, 2008 | posted by Michael Baxter in UK economy | comments (3) | Print This Post

The Centre for Policy Studies is not a fan of the Labour Government. If you browse its web site, you will find a plethora of articles with headlines such as “Tories’ economic legacy has been squandered” and “The EU’s costs are outweighing the benefits.” It seems that many of the articles on the site seem to reflect the views held by members sitting on a certain wing of the Tory Party.

There is nothing wrong with that, we live in a democracy and many would argue these are legitimate views, but in the interests of balance, it often seems to damage the credibility of an argument when it is presented with too much of a political stance.

Even so, it is difficult to argue with the latest report from the Centre. Entitled “Why do we feel so broke?” and penned by Charlie Elphicke, who by the way was selected last year to represent the Conservative Party in Dover.  It makes damming reading.

The average household’s disposable income after deducting housing costs is lower today than it was in 2002.

The report showed that for an average family, gross income rose by 19 per cent over the five years between 2002 and 2007. But then, when you take off tax, and add on child tax credit, earnings after tax rose by around 18 per cent.

But then, if you take into account council tax, mortgage interest payments, water, gas and electricity and household repair costs, then the level of disposable income after these items actually fell 5 per cent.

Now this analysis isn’t perfect. After all, mortgage repayments, utility bills, and council tax have seen above-average inflation increases. By focusing on household costs, Mr Elphicke was in effect focusing on data that would by default throw up a particularly bad result. After all, it ignores areas where inflation has actually been negative.

If, instead, we compare the data with official inflation figures, the result isn’t quite so bad. The RPI index (that’s the older measure used for calculating inflation, which includes mortgage repayments and council tax) increased by 17 per cent over that period. So disposable income just about kept ahead of inflation.

Even so, the report tells a story which often seems to get forgotten.

Latest data from the Office for National Statistics revealed that average earnings with bonuses rose by 4 per cent in the 12-month period to December. This was exactly the same as the increase in the Retail Price Index over that period.

There’s lies, damned lies and statistics. These days, when targeting inflation, the Bank of England is supposed to keep the Consumer Price Index within 1 percentage point of 2 per cent. But people fall into the trap of comparing our earnings with this index – and it’s a misleading guide. The RPI index, on the other hand, is a far more accurate gauge of how inflation is affecting us.

So, just bear all this in mind next time an economist, or a property market bull, paints a rosy picture, saying as earnings start to rise interest payments will become more affordable.

But there is something else that neither the report from the Centre for Policy Studies, or indeed the official RPI data, take into account.

Sure, mortgage interest payments have shot up, but what about the cost of repaying the initial sum borrowed.

We all know that between 2002 and 2007 house prices rose much, much faster than inflation. And with that increase, the size of mortgages rose dramatically too. And yet, the area of biggest cost increases is the one area which just about all reports systematically ignore.

Now, you might say, the cost of repaying a mortgage doesn’t matter. Well, you could to an extent have got away with that argument in the 1970s, when runaway inflation made the size of a mortgage relative to earnings reduce very rapidly. But in today’s era of low inflation, surely the repayment of the initial amount borrowed is more important than ever.

An economist answering to the name of Minsky, once talked about three stages in the development of a credit bubble. Stage 1, borrowing is affordable. Stage 2, borrowers can’t afford to repay the loan, but they can afford to pay interest. Stage 3, they can’t even afford interest, and may borrow from elsewhere to repay existing loans.

Then, all of a sudden credit dries up – backlash against the untenable borrowing occurs – this is called the Minsky moment.

For some time now, much of the lending on houses was only repayable if the houses went up in value – it seems Minsky’s moment might be upon us.

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