...a blog by Richard Flowers

Friday, August 22, 2008

Day 2784: Safe as Houses


Now this is where the bite of the credit crunch starts to get NASTY; people are losing their homes.

Repossession orders, the lenders' first step towards kicking someone out of their home, are up by 24%; and last week we learned that full repossessions are up by 48%!

"This suggests that we are on track for a repossession crisis very similar to the early 1990s." warned Liberal Democrat Shadow Chancellor, Mr Vince "The Power" Cable.

The terrible irony is that the Government recently BOUGHT a major bank. You may have heard of it, it was called the Northern Rock.

They COULD be using that to CALM the troubled housing market: just as Sooty in the Treasury seems willing to extend more than generous credit terms to the "Bank that Likes to Say OOPS!" and indeed take a larger equity stakeholding, he COULD be pressing them to be more generous with their mortgage customers.

Remember repossession is the WORST outcome for everyone – the homeowners become homeLESS, while the bank is saddled with a duff property in a poor housing market. Everyone looses.

Offering to take a part share in the equity in exchange for the customer continuing to pay a more manageable mortgage on the rest, means that the bank keeps a stream of income and can make a future profit on the capital when the homeowner is either able to buy it back, or when the housing market recovers and they sell the property.

Alternatively, how about arranging for the local council to buy a part share or even all of the property, taking the homeowner on as a tenant (a sort of reverse "right to buy")? The Council gets to improve its housing stock at an affordable rate and is able to house the household who would otherwise become homeless and have to be found some other accommodation. Nor does the homeowner lose out, since they will be able to use the right to buy to buy their home back later.

I realise that Sooty has other economic woes on his mind at the moment…

Inflation is up to more than double the Government's target at 4.4% (with the more realistic cost of living index the RPI up 5% and food inflation at an eye-watering 13.7%).

Unemployment is rising as well, up 60,000, which makes it harder for the economy to pull back out of recession.

And Sterling is down against all currencies, even the dollar (the DOLLAR!) as speculators gamble that the need to keep the squeeze on inflation is less urgent than the need to kick-start the economy so the next interest rate move will be down rather than up.

…but more than any other country in Europe, or possibly even the World, Great Britain's economy is built on bricks and mortar. The motto that an Englishman's home is his castle, would be more accurately reworded as an Englishman's home is his SAVINGS, INVESTMENT and PENSION.

In other countries there is much less importance placed on "home ownership" and as such people have more diversity in where they put their money; here, your house IS where you put all your money, getting the biggest house for the biggest mortgage you can. Which is fine and dandy when interest rates are low, salaries rise regularly and house price inflation rockets away. Because the mortgages gets (comparatively) easier to pay and you make a tax-free profit on the resale of the house. Everyone is happy (except the poor first-time buyers who can't afford a shoe box!).

But it is HIGH RISK when everything hinges on one big investment. Because when interest rates surge and wages stagnate and house prices go into freefall, no one has anything else to fall back on.

That is why it was RECKLESS to let the housing bubble get so overheated in the first place, why letting people run up so much debt against the value of their home was such a BAD IDEA.

A correction in the price of houses has been coming – indeed needed – for ages and frankly the government were warned about that too. Now it's arrived and they need to be taking steps to ensure that it is as gentle a crash as is humanly possible.

Unfortunately, Sooty does not appear to come fitted with AIR BAGS.

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