Context: consumer spending and mortgages in the UK

I little perspective on the post about spending in the US, below.

The Guardian tells us that consumer spending in the UK is up:

The Office for National Statistics said that retail sales last month were 3.9% higher than in May 2006, while over the three months to May 2007 business was up 4.4% on the same period a year ago.

In Australia, by the by, consumer spending is up by around 4.9%. Hence the discussion way back about why we face rate increases for quite different reasons.

So the US’ blip in consumer spending isn’t all that hot, relative to some of its OECD friends. Which isn’t necessarily a bad thing, frankly (Eco 1 students?). Higher relative GDP growth for America’s trading partners should mean good news for its Balance of Payments.

Here’s a similarity: fully-leveraged mortgages are on the rise in the UK (or at least, lenders are). This, by the by, sets up the conditions under which Howard won his last election (and is having a shot at swinging this one, too).

According to research from price comparison service MoneyExpert.com, the number of fixed rate mortgages that will lend the entire value of a property more than doubled in May this year from the same month in 2006, boosting the number of deals from 60 to 127.

I don’t consider this a good thing. The Guardian adds,

Further good news for first-timers is that, despite a 1% rise in interest rates over the past year, 100% mortgages have lagged behind in price. The typical initial rate now payable on a mortgage for someone without a deposit is 6.49%, compared with 5.89% a year ago.

However, borrowers requiring a loan for the full value of a property, while also wanting to protect their monthly mortgage repayments, will still have to pay for the privilege.

“It will cost borrowers around 1% more in interest to take a 100% loan compared to a 90% loan,” said Ray Boulger, senior technical director at broker John Charcol. “And the difference in price between the best tracker and the best fixed rate deal is currently around 0.5%.”

So we see parallels, no? with sub-prime lending in the US (currently nearly 16% of sub-prime mortgages in the US are 30 or more days past due).

Why do I not see this as the good news that we are lead to believe it is (even for the people who need them)?

Point 1: Fully-leveraged mortgages aren’t really substantially cheaper, once payment insurance is purchased – and it bloody-well should be, for a 100% loan.

Point 2: It may well not be. These mortgages appeal to first-home buyers struggling to get the deposit together. They will be more tempted than not to leave that 1% extra cost off their mortgage.

Point 3: Related to point 2. Like the subprime lending in the US, the dodgy mortgages are built for poorer potential homeowners (I’ll return to this in a second).

Point 4: At 100% your mortgage is your house, with no spare equity. In a slump, your house will go down in value, but your mortgage won’t. Alternatively an increase in borrowing rates on an adjustable-rate mortgage (say, when consumer spending is around 4% and holding) will also tip you over. That last thing you want is a mortgage worth more than the house it’s on, because if you lose the house you end up with no house, starting over, and saddled with debt from the mortgage.

Point 5: If you have one of these mortgages, the odds that you can easily afford increases in monthly repayments are small – hence the disastrous fallout awaiting the US.

People should never be allowed to borrow to the cliff’s edge, because they’re the least capable of absorbing any sort of shock whatsoever. Increasing interest rates and they can’t make payments, and have to foreclose – but with higher interest rates they may secure a lower price for their house. Come a recession, a layoff and they have the same problem (particularly without payment protection). If it is a recession, they again get lower prices for their house.

I think Jim Kunstler has hit upon this once or twice. The simple, pseudo-Malthusian fact is that some people don’t get to own houses. It is unpleasant, in this age of prosperity. We believe we can have everything (hence the consumer spending surging on the back of unsecured debt), but we cannot.

The subprime lending market is an example. This is a market of people who don’t qualify for properly-structured mortgages, and sustainable paths to home-ownership. The path they take is not sustainable. When the economy does what economies are supposed to do, they go over that cliff’s edge. There’s no reason why the UK will be any different. To my pessimistic mind fully-leveraged and/or subprime borrowers are Potential Big Losers (or Big Victims) and recession accelerators.

I acknowledge, by the by, the rental argument (that rents are so high you cannot save and pay rent, but this doesn’t mean you can’t adequately afford mortgage payments). This argument really only applies to people who can’t afford to make montly mortgage payments comfortably. For the latter group, I would still say it’s a bad move, relative to moving, if necessary, to lower your cost of living and saving the deposit required to buy a house with some equity from the start.

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