www.mortgagestrategy.co.uk COMMENT
The end of the
world has been
cancelled for now
ROBERT EVERETT
MANAGING DIRECTOR
MORTGAGE OPTIONS GROUP
Confidence is returning, thanks largely to the fact that
governments have learnt the lessons of the 1930s
Spring is in the air and the
end of the world has been
postponed. Confidence is
slowly returning and there
is a general feeling of optimism in
the air, including an improvement
in consumer confidence.
The stock market has seen a
27% rally since its lows early in the
year and the Bank of England says
that there are promising signs of a
deceleration in the economic
downturn.
But comparisons with the 1929
US stock market crash and
subsequent Great Depression are
ever present. And our situation is
indeed uncannily similar to 1929 in
many ways, but thankfully not all.
I have been reading the
well-known book on the subject –
The Great Crash Of 1929 by
economist JK Galbraith.
The events that led up to the
crash of 1929 are remarkably
‘‘
Consumers believed that
they were entitled to vast
wealth in return for doing
nothing other than borrow
similar to those we have seen in
this generation, namely banks
lending heavily to anyone and
everyone.
In the 1920s a period of easy
credit allowed individuals to
borrow beyond their means and
speculate by buying land and stocks
on margin.
Ordinary consumers began to
believe they were entitled to vast
wealth in return for doing nothing
other than borrow from banks and
use their money to gamble and
become rich.
This one-way gravy train
produced a period of overwhelming
optimism and a conviction that
everyone was going to be wealthy.
Of course, the orgy of speculation
ignored economic fundamentals.
But what makes that period
different to the present day is that
back then policymakers took the
wrong decisions. In an effort to
stem the tide of speculation they
publicly announced their concern
and simultaneously increased
interest rates, followed by silence
and doing nothing.
This laissez-faire policy added
to the prevailing uncertainty
and fear, eventually allowing panic
to take a grip.
By the time optimism was
replaced by despair there was
nothing governments could do. As
a consequence, in the first six
months of 1929, 346 banks failed in
the US alone and unemployment
soon hit 25%. For a decade, bankers
were fair game for politicians, the
courts and the press.
In the present recession, I
believe governments around the
world deserve a lot of credit for
acting quickly in reducing interest
rates, supporting banks and
injecting liquidity into the market
in the form of
quantitative easing.
It is as a result of
this that I believe a
mood of optimism is
returning.
This has been a
challenging time for our industry
and mortgage finance is still in
short supply, although again there
are promising signs of LTVs
easing. Furthermore, interbank
lending rates in London fell to
record lows last week.
Economic life is governed by an
inevitable rhythm and recessions
are just a natural way of balancing
the economy and giving it a
breather.
All sound businesses should use
this time to manage their costs and
refocus on their core functions.
That way, when better times come
around they will be in a good
position take advantage.
So we are seeing the return of
consumer confidence and mounting
evidence that the worst of the
world’s economic woes are behind
us but these green shoots are
fragile and it is important that none
of us relax or lower our guard.
There’s an old economic
saying that when the US
sneezes, the world catches
a cold.
Perhaps this is an unfortunate
comment to make at a time of
rampant swine flu but at least it
makes clear that issues affecting
our American
‘‘
cousins often make it
across the Atlantic
and hit dear old
Blighty.
Of course, the
understanding is
that this impact is
invariably negative and with the
recent credit crunch, this has
certainly been the case.
But on many occasions US
innovation and foresight has
travelled well.
As Sir Winston Churchill said,
we may be two nations divided by a
common language, but I have been
impressed by some of the methods
used to help first-time buyers
across the pond as opposed to what
they are offered in the UK.
A recent article in USA Today
made clear the support that is being
offered to US first-timers compared
with the lip service dressed up as
support here.
The number of repossessions in
some US states has been nothing
short of horrific in recent months
but it now seems that many of
these homes – particularly those
that have become distressed – are
being picked up by first-timers
taking advantage of the low prices,
US-style help for
first-time buyers
urgently required
MICHAEL WHITE
CHIEF EXECUTIVE
EMAIL MORTGAGES
US first-time buyers are getting some great deals and
we could do with some of that brave spirit over here
low rates and significant tax breaks
on offer.
US first-time buyers are now
able to purchase repossessed
properties with $8,000 tax breaks at
fixed rates of 5.5% with just 3%
deposits. With deals like that, no
wonder the number of unsold
US first-timers can buy
repossessed homes with
$8,000 tax breaks at rates
of 5.5% with 3% deposits
homes in the US is starting to
shrink.
These mortgages are available
from lenders in the land where the
credit crunch kicked off, so why is
the situation so different over
here?
If our first-time buyers want
to purchase homes – repossessed
or not – they are looking at a
minimum 25% deposit to get a rate
anywhere near 5.5%.
A 3% deposit is like dreamland
to them and while 90% LTV deals
may be available rates are high,
as are fees. Is it any surprise that
first-time buyer interest is not
translating into completions?
Not only do we have lenders
reluctant to provide high LTV
products to first-time buyers, we
could be only months away from
the Financial Services Authority
outlawing such deals. The UK
housing market is destined to
continue along the same course if
this happens.
Back in World War II US
servicemen who came to the UK
were said to be overpaid, oversexed
and over here. Frankly, the UK now
needs to see the mortgage product
equivalent of those servicemen.
But we’re not asking for sexy
products, just common sense
lending so we can help potential
purchasers negotiate some hurdles
and allow them one day to overpay.
Without this sort of boost, it will
be over and out for the UK
first-time buyer market.
MORTGAGE STRATEGY May 18, 2009 23
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