Tag Archives: uk property market

Britain’s Zero percent APR Addiction

image of Britain addicted to zero percent APR, showing map of country on a zero percent drip

UPDATE June 28th – Now Mark Carney agrees with me!

Britain today is addicted – addicted to cheap credit

Britain’s zero percent APR addiction entails endless adverts for cars, vans, furniture, white goods etc where you are charged zero percent interest and they even contribute towards your deposit! At the same time nobody is really interested in you paying up front for anything and savers are lucky to get over 1% on their savings. No wonder so many older people almost feel forced to enter the buy-to-let market and many young people have given up on saving.

It’s now almost pointless to hold large sums of money on deposit. It’s true that we are warned by Mark Carney and others on a regular basis about what might happen ‘when interest rates rise’. But maybe they never will – at least not in the medium term, because our whole economy is hopelessly addicted to cheap credit – that goes for the car industry, manufacturing and indeed the property market.

How did we get here?

The main source of our current addiction leads back to the financial crash of 2008, when the banks – mainly American, nearly trashed the world economy. Following that crash it was necessary for government and banks to progressively lower the rate of interest just to keep the economy turning over. This has been true the world over but it is particularly critical in Britain where a disproportionate  amount of the nation’s cash is locked up in property. Thus the very roofs over British people’s heads depend upon the perpetuation of cheap credit – not to mention the existence of the likes of B&Q and Homebase.

However the other main reason is the massive suppression of ordinary people’s wages over the past 20 years or so, due largely to mass immigration, the increased power of directors and the decline of trades unions. Employers can literally pick and choose employees, whilst offering them absolutely paltry wages. Thus the only way employees’ purchasing power can be maintained is with cheap and widely available credit. Enter the enticing Zero Percent APR.

The Property Market

The fall in interest rates is indeed worldwide, but because we in Britain have such a love affair with property ownership it has drastic effects on the housing market here. Many older people who would have once tucked their savings away in their local building society now feel almost forced to jump into buy-to-let, where yields of 6% are fairly easily attained. This in turn drives up demand for property, putting it even further out of the reach of the majority of younger people. When I was young it was fairly normal to buy your first property in your late 20s but now many are having to wait until their late 30s or even 40s before they can ‘get on the property ladder’.

You would assume that because mortgages are so cheap that younger people would be able to afford them but because of the traumatic experience of easily available mortgages before 2008, banks and building societies tend to look for relatively high deposit to loan ratios.

So will interest rates ever rise?

Obviously no one has a crystal ball, but as I have said, I certainly believe they will not rise in either the short or the medium term – maybe 10 years. Chronically low interest rates and quantitative easing mean that money itself is losing its value and that is a very dangerous thing. Perhaps if there is a change in the employment market where people are actually paid more realistic wages then this could eventually begin to turn the tide in the opposite direction. Maybe in many years time interest rates may at least climb to 3 or 4% and people might start saving again – who knows?

 

LandlordsandLetting – affordable landlord insurances.

 

Yet another property buying panic, partly thanks to Mark Carney?

Mark Carney Estate Agent Sold Boards UK Map

Late last year Mark Carney, the Governor of The Bank of England helped set the stage for yet another property buying panic when his forward guidance suggested that interest rates in the UK were likely to fall.

That’s a ‘fall’ from their historic low of 0.5%! Added to this is the forthcoming ‘Annuity Liberation’, whereby from this April 2015 people will be free NOT buy an annuity to provide themselves with a secure pension.

A hard choice?

So, the decision for new pensioners and others is… should I buy an annuity, put the money into a savings account and get 1.5% (if I’m lucky), or buy a property to let and get around 5% net yield with a probable long term capital growth?  Hhhmmm – as the actress said to the bishop, that’s not a hard one!  Of course people will say that savings aren’t investments, but what other options exist? Corporate Bonds are indeed a realistic possibility but they do require a certain amount of research and understanding and are not for the unsophisticated investor. Other kinds of investment vehicles such as funds are also a possibility but ultimately you are also paying for the services of very expensive fund managers.

Hooked on low interest rates

In reality, the ludicrously low interest rate is making ‘investors’ of us all. For several years now, so-called financial commentators have been ‘warning’ of an interest rate rise. I am aware of the old adage that ‘what goes up must come down’ and vice versa, but I personally don’t think that interest rates will rise again for many years.

The reasons for me saying this are as follows:

  • The Governor of The Bank of England has already predicted a FALL in interest rates due to falling levels of inflation.
  • The Euro is a basket case currency and most of Europe has very high levels of unemployment, partly due to the ridiculous Euro and partly due to the incompetent idiots running the EU. So now the European Central Bank is about to start ‘printing money’ in order to stave off deflation.
  • We’ve had extremely low interest rates for over 6 years and…here’s the important one…property owners and the UK economy are addicted to low interest rates. Any noticeable rise interest rates would cause panic selling by massively leveraged buyers, particularly in the buy-to-let sector. This would cause recession in the supply chain, such as companies like B&Q, Homebase, Wickes, architects, tradespeople,  solicitors, builders’ merchants, construction companies, banks, building societies and other course, our much loved estate agents and conveyancing solicitors. Well, as they say, every cloud has to have a silver lining! And of course the knock-on effect would be felt right through the UK economy.

Panic Property Buying – the signs are all there

We’ve recently reluctantly felt impelled to join in the panic property buying phenomenon. Now, I know that Warren Buffet wisely says, ‘When everyone’s being greedy, be afraid and when everyone’s being afraid be greedy’. But because Britain is a very overcrowded country with unsustainable levels of immigration and we are all hooked on low interest rates, I cannot foresee a time when property buyers will again be ‘scared’. I appreciate of course that these observations will be mainly applicable to London, The South East, Manchester, parts of The Midlands and The West Country.

We have seen flats and houses advertised for say £190,000, only to find that the agents are using these as ‘guide prices’, meaning that after you get involved in negotiations you find that they are going to best and final offers which could be more than 10% above that supposed ‘asking price’. In effect they are running blind auctions on property, and even if it’s crap, it usually has offers on it within a few days of going on the market. Also, time and again we are finding that agents are advertising places for sale when in fact they have sold them several weeks ago. They then claim that the vendors asked them to keep the property on the market even though someone is going through the process of buying the property. Sometimes the agent blames Rightmove or Primelocation. ‘We told them to take it down but they’re very slow you know’. Basically a case of ‘it’s not me guv’.

Of course the real reason for all this is that there is a massive imbalance between supply and demand – huge demand and not enough properties to go round all the agents.

In conclusion

We are obviously living in a society where real money is becoming gradually worthless. There are endless car ads telling you that all you need to buy a top of the range Audi for example, is £299.00 a month – no mention of the actual purchase price. If you ask a shop if they offer a discount for cash they usually laugh in your face and suggest you take out a credit agreement with them! Almost every major consumer good is advertised at so much a month, particularly things like mobile phones. Banks and building societies basically are treating savers with contempt  and offering them 0.2% on their ‘ONLINE SUPER PLUS SILVER SAVER ACCOUNT’ or some sort of nonsense.

It is of course good news for companies linked to the property market like Landlords and Letting! This is because it means many more landlords needing to take out rent guarantee insurance in case of defaulting tenants. But for the wider economy I think things are badly out of balance.

So in conclusion, I guess it’s a case of Carry on Buying – rather like an old much loved British movie really!

UPDATE MARCH 2015

Mark Carney and the Monetary Policy Committee are now saying that the next move in interest rates is likely to be UP!  I suspect that this is because they realise that their earlier speculation that interest rates would fall has started a buying panic – which it has, and they are now seeking to calm things down.

 

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