News Review: Economics


Government strategy small help for gloomy UK by


Fionnuala Earley,


UK consumer economist, Royal Bank of Scotland


the chancellor’s autumn Statement was pretty gloomy listening. But then we hadn’t expected it to be full of cheer. the uK economy is weaker and its fiscal position is more precarious than previously thought. and we will have to swallow the austerity medicine for longer. the office for Budget


responsibility cut its growth forecasts for 2012 to 0.7% from the 2.5% announced in march. it also revised up its unemployment forecast, from 8.1% to 8.7%, which includes high levels of youth unemployment. tax revenues will be lower and welfare payments higher as a result. But more worrying is that


the oBr is concerned that the uK’s growth potential has been damaged by the crisis and the concern that a poorly skilled workforce will drag down the economy’s potential to grow in the future. together this all means that it will take longer to cut the deficit. it now looks like it will take up to seven years. a lot longer than the chancellor had hoped. that isn’t very good news


for any swift recovery in the housing and mortgage market. a continuing squeeze on the growth in household incomes is one part of it but so too is the impact rising unemployment may have. if this causes a rise in the number of forced sales hitting


the market, it will inevitably depress house prices, hit confidence and make higher LtV loans more risky.


Recovery george osborne will be concerned if house prices begin to fall more quickly. Like any asset, our houses are part of our wealth. if our assets fall in value, so does our wealth, which affects our desire and ability to spend and so stimulate demand in the economy. But the chancellor isn’t only concerned with house prices for this reason. He is also aware that a vibrant housing market is important to the wider economy for the knock on effects it has on other industries. Healthy turnover in the market is key to employment in various economic sectors - not just mortgage brokers, estate agents and solicitors, but suppliers of household goods and most importantly housebuilders.


Housing strategy the coalition government hopes to stimulate activity in the housing market and some economic growth through its new housing strategy document.


Stimulating


demand for new build property by encouraging lending at higher loan to value ratios should help house builders to complete existing mothballed sites and so increase construction and associated employment. the government estimates that every new home creates up to two jobs for one year, so increasing new homebuilding should contribute to economic growth as well as


14 mortgage introducer JANUARY 2012


Affordability the theory is sound and should help to unlock some of the bottleneck. it has certainly been well received by the house building industry. and if the mitigation of the lending risk leads to a lower capital charge on high LtV lending within the scheme, this will tick a big box for lenders– particularly as the FSa and Bank of england governor mervyn King have


addressing the uK’s structural shortage of housing. the new Build indemnity


Scheme is similar to the old mortgage


indemnity


guarantee scheme in that it is aimed at reducing the risks of lending at high LtVs. this is a particular problem in a market where there is an expectation that prices will continue to fall. indeed the Bank of england’s credit conditions Survey reported a net balance of 16.2% of lenders who thought that the outlook for house prices negatively affected the availability of mortgage credit. nationwide’s


consumer


confidence Survey shows consumers also expect prices to continue to fall over the next six months.


“Even though this policy will help some households get their foot on the housing lad- der, it won’t solve the problem for everyone”


encouraged banks to bolster their capital. But whether the theory


works in practice comes down to affordability. at the peak of the market the average house price to earnings ratio for a first-time buyer was almost 7. it’s now just under 5. this is certainly much better - and closer to the average since 1983 of 4.1. But if we look at things in cash terms, it’s still not going to be very easy. an average 22-29 year old household has a gross income of about £25,000. But taking tax and national insurance into account this comes down to about £19,500. if we take expenditure on food, transport and utilities (but not rent) into account, this reduces their discretionary income to a much smaller £13,300. at this level of income it would still take four years to save for a 5% deposit. But having leaped that hurdle, monthly payments still have to be maintained. a repayment mortgage payment of £630 per month at current rates, only leaves about £430 per month free for other things. if the deposit was 20%, the mortgage payment would be about £100 less per month, giving a much more comfortable cushion. But the downside is that it would take almost three times as long to save the deposit. So even though this policy


will help some households get their foot on the housing ladder, it won’t solve the problem for everyone and is unlikely to bring transactions back to normal levels. For that we need a much wider economic recovery, and not just in the uK.


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