Sunday, 24 May 2020
Most ingredients are in place for a property crash later this year
Rising unemployment is toxic for the property market and low interest rates may not be enough writes Larry Elliott in The Guardian
Spring is usually the time when the property market comes out of hibernation. Photograph: lucemac/GuardianWitness
This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.
Normally this happens at Easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.
Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.
That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.
Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.
Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.
Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.
The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.
Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.
Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.
Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.
Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.
Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.
There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.
So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.
But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.
This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.
Normally this happens at Easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.
Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.
That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.
Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.
Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.
Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.
The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.
Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.
Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.
Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.
Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.
Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.
There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.
So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.
But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.
Saturday, 23 May 2020
Reopening the economy will divide societies
Tim Harford in The FT
It is the end of the beginning: lockdowns after the first wave of coronavirus are being tentatively lifted. It is not a step we are taking with any great confidence of success. Rather, we’re easing the lockdowns because we can’t bear to wait any longer.
That will mean some difficult decisions ahead, in particular about how we look out for each other in a world where our experiences and the risks we face are dramatically diverging.
It is clear enough that the virus could easily rebound: a systematic study conducted by the Office for National Statistics suggested that 100,000 to 200,000 people in England alone were still infected with the virus in early May. The lockdown has merely bought us time.
One hope is that we can now contain the virus through widespread testing, contact tracing and the supported isolation of infected people. One cogent plan for this comes from the Safra Center at Harvard University.
But the UK seems in no position to implement anything like this plan. Boris Johnson, the prime minister, has promised a contact-tracing system by June 1 that will be “world-beating” — an obnoxious synonym for “excellent”. I do not believe him, particularly since his government has repeatedly misrepresented its record on testing.
The Safra Center plan calls for 2 per cent to 6 per cent of the population being tested every day. In the UK, that would be 1.3m to 4m people daily; we are currently testing well under 100,000 a day.
For now, then, we are stuck trying to maximise the benefits of reopening while minimising the risk. That suggests drawing bright lines between those who should unlock and those who should not.
We have long accepted that a supermarket is more of a priority than a restaurant, but other dividing lines would be uncomfortable. Would we be happy for London to reopen while Manchester stays closed, or vice versa? There is a powerful moral case that we should all be going through the same sacrifices at the same time, but if we seek to save the greatest number of lives while destroying the fewest livelihoods, we may have to start drawing distinctions that make us squirm.
The most obvious such distinction would be to ease the lockdown only for the young.
In the five weeks from late March to the start of May, nearly 29,000 people over the age of 65 died from Covid-19 in England and Wales. Only 375 people aged under 45 died in the same period. Late boomers and Gen-Xers like me, aged 45-64, are in the middle: nearly 3,500 of us died.
Could we countenance a plan to allow the under-40s back into pubs and restaurants, while the rest of us stick to Zoom and Ocado? Then if signs of herd immunity emerged, we could send in the reserves — the 40-somethings like me.
Is this really a good idea? I am genuinely unsure. Perhaps the practical objection is insuperable: it might be impossible to protect vulnerable people while allowing the virus to run riot in the young. But I suspect the real objection is not practical, but moral. Something about sending half the population out while the other half stays indoors feels unfair. That is true even if it is not entirely clear which side of the age divide is worse off — the ones enduring boredom and isolation inside, or the ones facing the virus.
And what of people who find themselves able to drink in public one day, then banned from their own 40th birthday party the next? Clear distinctions on a spreadsheet or graph start to seem absurd in everyday life. And it could be much worse. Ethnic minorities are at greater risk; are we to advocate whites-only restaurants and whites-only public transport on the grounds that it is not safe for those with dark skin? The idea is self-evidently repugnant.
Yet the virus does not care about our moral intuitions. It picks us off unevenly, and an effective response must recognise that. We are going to have to develop a language of social solidarity even as our individual experiences diverge.
Even during the lockdown, many people have continued to experience the freedoms and anxieties of going to work as normal. The very nature of the lockdown means it is easy to forget that other people are leading very different lives. One doctor friend of mine, on a video call a fortnight ago, asked: “So . . . have the rest of you really just been at home, seeing only your families, for the last six weeks?” Yes. We really have.
We must develop new ethical codes. “Stay at home, protect the NHS” was a start, but over the coming months we must look for principles that offer the same moral force but far more practical subtlety. “Grandparents: stay home so that your grandchildren can go back to school.” “Home workers are heroes too,” because they reduce density in the big cities.
We are all in this together. And yet increasingly, we are all in this separately. That is a challenge we have yet fully to confront.
It is the end of the beginning: lockdowns after the first wave of coronavirus are being tentatively lifted. It is not a step we are taking with any great confidence of success. Rather, we’re easing the lockdowns because we can’t bear to wait any longer.
That will mean some difficult decisions ahead, in particular about how we look out for each other in a world where our experiences and the risks we face are dramatically diverging.
It is clear enough that the virus could easily rebound: a systematic study conducted by the Office for National Statistics suggested that 100,000 to 200,000 people in England alone were still infected with the virus in early May. The lockdown has merely bought us time.
One hope is that we can now contain the virus through widespread testing, contact tracing and the supported isolation of infected people. One cogent plan for this comes from the Safra Center at Harvard University.
But the UK seems in no position to implement anything like this plan. Boris Johnson, the prime minister, has promised a contact-tracing system by June 1 that will be “world-beating” — an obnoxious synonym for “excellent”. I do not believe him, particularly since his government has repeatedly misrepresented its record on testing.
The Safra Center plan calls for 2 per cent to 6 per cent of the population being tested every day. In the UK, that would be 1.3m to 4m people daily; we are currently testing well under 100,000 a day.
For now, then, we are stuck trying to maximise the benefits of reopening while minimising the risk. That suggests drawing bright lines between those who should unlock and those who should not.
We have long accepted that a supermarket is more of a priority than a restaurant, but other dividing lines would be uncomfortable. Would we be happy for London to reopen while Manchester stays closed, or vice versa? There is a powerful moral case that we should all be going through the same sacrifices at the same time, but if we seek to save the greatest number of lives while destroying the fewest livelihoods, we may have to start drawing distinctions that make us squirm.
The most obvious such distinction would be to ease the lockdown only for the young.
In the five weeks from late March to the start of May, nearly 29,000 people over the age of 65 died from Covid-19 in England and Wales. Only 375 people aged under 45 died in the same period. Late boomers and Gen-Xers like me, aged 45-64, are in the middle: nearly 3,500 of us died.
Could we countenance a plan to allow the under-40s back into pubs and restaurants, while the rest of us stick to Zoom and Ocado? Then if signs of herd immunity emerged, we could send in the reserves — the 40-somethings like me.
Is this really a good idea? I am genuinely unsure. Perhaps the practical objection is insuperable: it might be impossible to protect vulnerable people while allowing the virus to run riot in the young. But I suspect the real objection is not practical, but moral. Something about sending half the population out while the other half stays indoors feels unfair. That is true even if it is not entirely clear which side of the age divide is worse off — the ones enduring boredom and isolation inside, or the ones facing the virus.
And what of people who find themselves able to drink in public one day, then banned from their own 40th birthday party the next? Clear distinctions on a spreadsheet or graph start to seem absurd in everyday life. And it could be much worse. Ethnic minorities are at greater risk; are we to advocate whites-only restaurants and whites-only public transport on the grounds that it is not safe for those with dark skin? The idea is self-evidently repugnant.
Yet the virus does not care about our moral intuitions. It picks us off unevenly, and an effective response must recognise that. We are going to have to develop a language of social solidarity even as our individual experiences diverge.
Even during the lockdown, many people have continued to experience the freedoms and anxieties of going to work as normal. The very nature of the lockdown means it is easy to forget that other people are leading very different lives. One doctor friend of mine, on a video call a fortnight ago, asked: “So . . . have the rest of you really just been at home, seeing only your families, for the last six weeks?” Yes. We really have.
We must develop new ethical codes. “Stay at home, protect the NHS” was a start, but over the coming months we must look for principles that offer the same moral force but far more practical subtlety. “Grandparents: stay home so that your grandchildren can go back to school.” “Home workers are heroes too,” because they reduce density in the big cities.
We are all in this together. And yet increasingly, we are all in this separately. That is a challenge we have yet fully to confront.
Why Sweden is unlikely to make a U-turn on its controversial Covid-19 strategy
For a foreigner living here, the country’s approach to handling the crisis is worrying, but it is partly explained by its history writes Tae Hoon Kim in The Guardian
Just 7.3% of Stockholm had Covid-19 antibodies by end of April, study shows
Whereas this might explain the lack of opposition, it is far from exhaustive. For example, Norway, Denmark and Finland are also known as high-trust societies. But all three have imposed far more restrictive measures, ranging from lockdowns to declaring a national emergency.
Second, the fact that some of the people most affected by the high death rate are from the poorest immigrant groups, such as the Somali community, whose voice is not always well represented in the media, goes against this image of a universally trusting and transparent society.
Perhaps another explanation is that Sweden has a very different way of perceiving the current crisis. Instead of seeing it as a national emergency or a fight against an “invisible enemy”, there seems to be a tendency to regard coronavirus just as a serious public health problem. It is viewed as something that requires the careful observance of rules set out by health experts, rather than an existential problem that calls for the state to suspend civil liberties for the sake of national security. Indeed, whenever a non-scientific expert such as me criticises the Swedish strategy, the response has often been that I am not an expert.
This is where Sweden is unique, something that may be attributable to its history. The country has not experienced a national emergency or crisis for more than 100 years. Since around the Swedish general strike of 1909, it has not seen any profound social conflicts, for example the miners’ strike in Britain, or a civil war, as in Spain or Finland. Any foreigner who has lived in Sweden will know how conflict-adverse Swedish people seem to be. Furthermore, Sweden has not engaged in any armed disputes since the 1810s. This is in contrast to Denmark and Norway, which were occupied by Germany in the second world war, and Finland, invaded by the USSR in the same period. A rallying cry of unity in the face of national adversity isn’t part of the collective cultural fabric in Sweden.
This lack of experience with handling national crises goes some way to explaining why there is a technocratic and dispassionate outlook to Covid-19, as opposed to a sense of urgency. It is also why the public health agency in Sweden seems to have few qualms about “herd immunity”. Whereas other countries see it as a dangerous national experiment, Swedish health officials regard it more as a type of medical prescription. It might not be 100% effective and some deaths might occur, as in any medical situation. But in the long run, it could work in mitigating the negative effects of the virus, without mass social disruption.
It is for this reason that the denial by the Swedish government and health officials that it is actually pursuing “herd immunity” seem so halfhearted, a rebuttal to critical foreign press rather than its citizens. For a foreigner living in Sweden like me, it is not entirely reassuring. How long Sweden will continue with this policy is difficult to ascertain. But as long as Covid-19 is seen in this light, and it looks as if it will, a U-turn seems unlikely.
People enjoy a warm spring day in Ralambshovsparken park, Stockholm, 8 May. Photograph: IBL/REX/Shutterstock
Sweden has received considerable media scrutiny in recent days. According to figures published on Tuesday, it now has the highest coronavirus-per-capita death rate in the world, with an average of 6.08 deaths per million inhabitants a day on a rolling seven-day average between 13 and 20 May. As of 22 May, Sweden has had 32,172 confirmed cases and 3,871 deaths. These figures are lower than those of Italy or the UK. But they are higher than those of Portugal and Greece, two countries with a similar size of population to Sweden. The figures are also much higher than Sweden’s Nordic neighbours, with Denmark at 11,182 cases and 561 deaths, Norway at 8,309 and 235, and Finland at 6,537 and 306.
International observers and critics within Sweden blame these depressing figures on its controversial Covid-19 strategy. Unlike the rest of Europe, or what is often cited as the exemplar nation of South Korea, Sweden has not imposed any lockdowns nor carried out mass testing. Its policy has been to slow the spread of the virus by exhorting its citizens to practise voluntary social distancing.
Some restrictions have been enforced, such as a ban on gatherings of more than 50 people, and a stipulation that drinks can only be served on seated tables as opposed to bars. Everyday life in Sweden is not the same as before. There are fewer people in shopping centres and public transport. Working from home has become the new normal for those who can. But people continue to socialise outdoors freely, while primary schools, hairdressers and shopping centres remain open.
But despite the high number of deaths, about 70% of Swedes support their government’s approach. In fact, there has not been much public debate or organised opposition to the strategy. The deaths have indeed shocked many Swedes, especially the disproportionately high number of deaths among those over 70 in care homes and those from working-class, immigrant backgrounds. The debates, however, seem to be taking a more socioeconomic angle. In other words, the reasons for these deaths are being blamed on structural, economic, and social deficiencies – but not on the strategy itself.
Why is this so? One explanation that has been aired frequently points to the high degree of trust between government agencies and citizens. The argument is that the level of government transparency and the state’s service-mindedness has created an environment where the people trust their government and experts.
Sweden has received considerable media scrutiny in recent days. According to figures published on Tuesday, it now has the highest coronavirus-per-capita death rate in the world, with an average of 6.08 deaths per million inhabitants a day on a rolling seven-day average between 13 and 20 May. As of 22 May, Sweden has had 32,172 confirmed cases and 3,871 deaths. These figures are lower than those of Italy or the UK. But they are higher than those of Portugal and Greece, two countries with a similar size of population to Sweden. The figures are also much higher than Sweden’s Nordic neighbours, with Denmark at 11,182 cases and 561 deaths, Norway at 8,309 and 235, and Finland at 6,537 and 306.
International observers and critics within Sweden blame these depressing figures on its controversial Covid-19 strategy. Unlike the rest of Europe, or what is often cited as the exemplar nation of South Korea, Sweden has not imposed any lockdowns nor carried out mass testing. Its policy has been to slow the spread of the virus by exhorting its citizens to practise voluntary social distancing.
Some restrictions have been enforced, such as a ban on gatherings of more than 50 people, and a stipulation that drinks can only be served on seated tables as opposed to bars. Everyday life in Sweden is not the same as before. There are fewer people in shopping centres and public transport. Working from home has become the new normal for those who can. But people continue to socialise outdoors freely, while primary schools, hairdressers and shopping centres remain open.
But despite the high number of deaths, about 70% of Swedes support their government’s approach. In fact, there has not been much public debate or organised opposition to the strategy. The deaths have indeed shocked many Swedes, especially the disproportionately high number of deaths among those over 70 in care homes and those from working-class, immigrant backgrounds. The debates, however, seem to be taking a more socioeconomic angle. In other words, the reasons for these deaths are being blamed on structural, economic, and social deficiencies – but not on the strategy itself.
Why is this so? One explanation that has been aired frequently points to the high degree of trust between government agencies and citizens. The argument is that the level of government transparency and the state’s service-mindedness has created an environment where the people trust their government and experts.
Just 7.3% of Stockholm had Covid-19 antibodies by end of April, study shows
Whereas this might explain the lack of opposition, it is far from exhaustive. For example, Norway, Denmark and Finland are also known as high-trust societies. But all three have imposed far more restrictive measures, ranging from lockdowns to declaring a national emergency.
Second, the fact that some of the people most affected by the high death rate are from the poorest immigrant groups, such as the Somali community, whose voice is not always well represented in the media, goes against this image of a universally trusting and transparent society.
Perhaps another explanation is that Sweden has a very different way of perceiving the current crisis. Instead of seeing it as a national emergency or a fight against an “invisible enemy”, there seems to be a tendency to regard coronavirus just as a serious public health problem. It is viewed as something that requires the careful observance of rules set out by health experts, rather than an existential problem that calls for the state to suspend civil liberties for the sake of national security. Indeed, whenever a non-scientific expert such as me criticises the Swedish strategy, the response has often been that I am not an expert.
This is where Sweden is unique, something that may be attributable to its history. The country has not experienced a national emergency or crisis for more than 100 years. Since around the Swedish general strike of 1909, it has not seen any profound social conflicts, for example the miners’ strike in Britain, or a civil war, as in Spain or Finland. Any foreigner who has lived in Sweden will know how conflict-adverse Swedish people seem to be. Furthermore, Sweden has not engaged in any armed disputes since the 1810s. This is in contrast to Denmark and Norway, which were occupied by Germany in the second world war, and Finland, invaded by the USSR in the same period. A rallying cry of unity in the face of national adversity isn’t part of the collective cultural fabric in Sweden.
This lack of experience with handling national crises goes some way to explaining why there is a technocratic and dispassionate outlook to Covid-19, as opposed to a sense of urgency. It is also why the public health agency in Sweden seems to have few qualms about “herd immunity”. Whereas other countries see it as a dangerous national experiment, Swedish health officials regard it more as a type of medical prescription. It might not be 100% effective and some deaths might occur, as in any medical situation. But in the long run, it could work in mitigating the negative effects of the virus, without mass social disruption.
It is for this reason that the denial by the Swedish government and health officials that it is actually pursuing “herd immunity” seem so halfhearted, a rebuttal to critical foreign press rather than its citizens. For a foreigner living in Sweden like me, it is not entirely reassuring. How long Sweden will continue with this policy is difficult to ascertain. But as long as Covid-19 is seen in this light, and it looks as if it will, a U-turn seems unlikely.
Friday, 22 May 2020
What would negative interest rates mean for mortgages and savings?
Hilary Osborne in The Guardian
What happens to my mortgage?
If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around nine in 10 new mortgages have been taken on a fixed rate.
If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.
Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% – so if your mortgage is at base rate plus 1 percentage points, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.
You will need to dig out your paperwork to see how low your mortgage rate could go.
Will new mortgages be free?
In Denmark, mortgages with negative interest rates went on sale last year. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will.
In the meantime, fixed-rate mortgages are getting cheaper and may continue to fall in price. Big lenders including HSBC and Barclays have reduced fixed-rates this week and more may follow. Hollingworth says borrowers now have a choice of five-year fixed rates below 1.5%, with HSBC’s deal now at 1.39%.
Tracker mortgages have been pulled and repriced with larger margins, to cushion lenders against falling rates. If rates are cut again, expect more of that, as well as the collars already seen on some deals.
A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend.
Fears over what might happen to property prices mean they are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. Some lenders that reduced their maximum mortgages while they were unable to do valuations have started to offer loans on smaller deposits, although the choice of 90% loans is very limited. “Lenders do have appetite to lend,” says Hollingworth.
What happens to my savings?
Savings rates have already been hit by the two base rate cuts in March and most easy-access accounts from high street banks are already paying just 0.1% in interest.
Andrew Hagger, the founder of the financial information website Moneycomms, says he thinks it is unlikely banks will start charging people to hold their everyday savings. “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,” he says. “However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”
Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.”
She is not ruling out a charge for deposits. “Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.
Wealthy savers are likely to be the first who would face a charge. Last year UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at the Danish Jyske Bank, similar charges apply.
“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.
What about loans and credit cards?
Personal loan rates are already low and are usually fixed, so you will not see your monthly repayments fall if rates go down. Credit card rates are usually low for new customers, but rise far above the base rate once introductory periods have ended, so will not be anywhere close to falling into negative territory.
Hagger says he does not expect card or loan rates to plummet in the near future, “as I think banks will continue to tighten their credit underwriting – I think they’ll be more concerned about rising bad debt levels due to a surge in unemployment, for the remainder of 2020 at least.”
This month Virgin Money closed the credit card accounts of 32,000 borrowers after carrying out “routine affordability checks”. It later reversed the decision, but this could be a sign that lenders are reviewing their customer bases and trying to reduce their risk.
You will need to dig out your paperwork to see how low your mortgage rate could go. Photograph: Joe Giddens/PA
The governor of the Bank of England, Andrew Bailey, has paved the way for negative interest rates, saying officials are actively considering all options to prop up the economy.
The Bank’s base rate stands at 0.1%, the lowest level on record, so it would not take much to take it into negative territory. The UK would not be the first country to have a negative rate at its central bank – Japan and Sweden are among those that have done so.
The governor of the Bank of England, Andrew Bailey, has paved the way for negative interest rates, saying officials are actively considering all options to prop up the economy.
The Bank’s base rate stands at 0.1%, the lowest level on record, so it would not take much to take it into negative territory. The UK would not be the first country to have a negative rate at its central bank – Japan and Sweden are among those that have done so.
What happens to my mortgage?
If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around nine in 10 new mortgages have been taken on a fixed rate.
If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.
Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% – so if your mortgage is at base rate plus 1 percentage points, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.
You will need to dig out your paperwork to see how low your mortgage rate could go.
Will new mortgages be free?
In Denmark, mortgages with negative interest rates went on sale last year. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will.
In the meantime, fixed-rate mortgages are getting cheaper and may continue to fall in price. Big lenders including HSBC and Barclays have reduced fixed-rates this week and more may follow. Hollingworth says borrowers now have a choice of five-year fixed rates below 1.5%, with HSBC’s deal now at 1.39%.
Tracker mortgages have been pulled and repriced with larger margins, to cushion lenders against falling rates. If rates are cut again, expect more of that, as well as the collars already seen on some deals.
A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend.
Fears over what might happen to property prices mean they are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. Some lenders that reduced their maximum mortgages while they were unable to do valuations have started to offer loans on smaller deposits, although the choice of 90% loans is very limited. “Lenders do have appetite to lend,” says Hollingworth.
What happens to my savings?
Savings rates have already been hit by the two base rate cuts in March and most easy-access accounts from high street banks are already paying just 0.1% in interest.
Andrew Hagger, the founder of the financial information website Moneycomms, says he thinks it is unlikely banks will start charging people to hold their everyday savings. “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,” he says. “However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”
Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.”
She is not ruling out a charge for deposits. “Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.
Wealthy savers are likely to be the first who would face a charge. Last year UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at the Danish Jyske Bank, similar charges apply.
“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.
What about loans and credit cards?
Personal loan rates are already low and are usually fixed, so you will not see your monthly repayments fall if rates go down. Credit card rates are usually low for new customers, but rise far above the base rate once introductory periods have ended, so will not be anywhere close to falling into negative territory.
Hagger says he does not expect card or loan rates to plummet in the near future, “as I think banks will continue to tighten their credit underwriting – I think they’ll be more concerned about rising bad debt levels due to a surge in unemployment, for the remainder of 2020 at least.”
This month Virgin Money closed the credit card accounts of 32,000 borrowers after carrying out “routine affordability checks”. It later reversed the decision, but this could be a sign that lenders are reviewing their customer bases and trying to reduce their risk.
The 3 big unknowns that have forced Nirmala Sitharaman to be prudent with economic package
The future of Covid-19 in India and its impact on the economy and govt revenues is unknown, so it’s better not to exhaust all options by May writes Ila Patnaik in The Print
Finance Minister Nirmala Sitharaman has indicated that she cannot use up all her options in the first two months of the fiscal year, as there are many unknowns. Her strategy may be unpopular, but it is prudent.
There are three big unknowns — the spread of Covid-19 after the lockdown is lifted, the impact of its spread on the economy, and the impact of the slowdown in the economy on government revenues.
-Also watch
--
The spread of Covid-19 was contained during the lockdown, but the crisis is not over. A cure has not been found. A vaccine, despite all best efforts, will take a while to be developed and become accessible to all. Until then, as the country is opened up, strategies for containing the virus are still being put in place.
So far, even though the number of cases and deaths have risen, they are not as high as predicted without the lockdown. Now that offices, shops, buses and flights will resume, the virus will spread again. Testing of all employees in high-risk professions, isolation of citizens above 55-60 and those with co-morbidities, and social distancing norms are critical to how we contain the number of cases and deaths. The sooner these are enforced, the better we may do.
Impact on economy
The impact on the economy is difficult to quantify. This is the first time such a global lockdown has occurred since economists have been making models to forecast growth. Most models are built utilising past behaviour of the economy, but the present situation is completely unprecedented. Many economists who were forecasting a positive rate of growth when the lockdown was first announced are now forecasting a contraction. Forecasts are still being revised downwards.
There will be a loss in GDP simply due to not producing in the nearly two months. For a back-of-the-envelope calculation, look at the IIP: Industrial production contracted by 16 per cent in March this year.
The lockdown was announced on 24 March, which suggests that factories were shut for 20 per cent of the days in that month. The whole of April saw almost a complete lockdown. We expect to see a serious contraction — maybe 70 to 80 per cent, if the March figures are anything to go by. Similarly, in the month of May, production was shut for most of the month.
Seven worries for production
In addition, there are seven reasons why production will take time to bounce back fully.
First, supply chains have been broken. Even if one part is not available, has not been produced or imported, it may delay the resumption of full operations in manufacturing. As densely populated urban areas have been in red zones, they have been shut at least the third phase of the lockdown. This has disrupted many supply chains.
Second, all labourers may not come back to work. Even for the spaces where there were no restrictions, there are many anecdotes of people not coming to work after the second phase of the lockdown got over. This was partly due to fear and partly due to difficulties of travel, domestic responsibilities, or old parents at home. About 30 per cent households in India live with elders, or where at least one member of the family is above 65. These people have repeatedly been warned to keep their elders isolated. In small homes, this is difficult.
In addition there is the migrant crisis. After being unable to be with their families, many workers are heading home. It may be some time before they come back, and even then, all of them may not come back.
Third, credit will be a constraint. The government has eased liquidity and banks can give credit to their customers. However, there is an entire ecosystem of small firms who depend, not on the banking system, but on informal sources of credit. These are sometimes their suppliers or their buyers who give them working capital for purchase of raw materials or payment of wages. There are an estimated 64 million small firms in India.
The MSME package announced by FM Sitharaman is expected to give relief to 4.5 million of these. For the nearly 60 million others, adequate credit may not be available to restart production.
Fourth, travel could remain restricted, could become more expensive, and until the fear of Covid-19 remains, the impact on many sectors — like aviation, hospitality, tourism etc. — may last for a few quarters.
Fifth, consumption will take time to pick up. Incomes have been disrupted. There is uncertainty about future incomes. Until now, people were not able to step out to buy, and so, sales were stalled. But now expenditure may get postponed even after people are able to step out to buy.
Sixth, exports contracted by 60.3 per cent in April. Orders will be down until the rest of the world economy picks up. Exports depend on global demand and world trade. This is expected to be severely hit this year.
Seventh, investment was already in trouble before the Covid-19 crisis. It was going to be an uphill task to revive it. The increase in uncertainty and the difficulties of credit, labour and restrictions are going to make the investment climate worse. This could also pull down growth.
Impact on government revenue
Finally, the third big unknown is the impact the economic slowdown will have on government revenue. As I have argued before, tax revenue will decline and that leaves the government with limited fiscal space.
So far, in the economic package, the government has permitted people to delay tax payments. If the economy does not pick up, the government may need to cut tax rates, including GST, to put money in people’s hands. This may impact tax revenues further.
With the large number of unknowns, the Finance Minister’s economic package tries to push liquidity, encourage reforms and increase agricultural incomes. No doubt, more can always be done, but it is prudent not to use up all her ammunition in the first two months of such an uncertain year.
There are three big unknowns — the spread of Covid-19 after the lockdown is lifted, the impact of its spread on the economy, and the impact of the slowdown in the economy on government revenues.
-Also watch
--
The spread of Covid-19 was contained during the lockdown, but the crisis is not over. A cure has not been found. A vaccine, despite all best efforts, will take a while to be developed and become accessible to all. Until then, as the country is opened up, strategies for containing the virus are still being put in place.
So far, even though the number of cases and deaths have risen, they are not as high as predicted without the lockdown. Now that offices, shops, buses and flights will resume, the virus will spread again. Testing of all employees in high-risk professions, isolation of citizens above 55-60 and those with co-morbidities, and social distancing norms are critical to how we contain the number of cases and deaths. The sooner these are enforced, the better we may do.
Impact on economy
The impact on the economy is difficult to quantify. This is the first time such a global lockdown has occurred since economists have been making models to forecast growth. Most models are built utilising past behaviour of the economy, but the present situation is completely unprecedented. Many economists who were forecasting a positive rate of growth when the lockdown was first announced are now forecasting a contraction. Forecasts are still being revised downwards.
There will be a loss in GDP simply due to not producing in the nearly two months. For a back-of-the-envelope calculation, look at the IIP: Industrial production contracted by 16 per cent in March this year.
The lockdown was announced on 24 March, which suggests that factories were shut for 20 per cent of the days in that month. The whole of April saw almost a complete lockdown. We expect to see a serious contraction — maybe 70 to 80 per cent, if the March figures are anything to go by. Similarly, in the month of May, production was shut for most of the month.
Seven worries for production
In addition, there are seven reasons why production will take time to bounce back fully.
First, supply chains have been broken. Even if one part is not available, has not been produced or imported, it may delay the resumption of full operations in manufacturing. As densely populated urban areas have been in red zones, they have been shut at least the third phase of the lockdown. This has disrupted many supply chains.
Second, all labourers may not come back to work. Even for the spaces where there were no restrictions, there are many anecdotes of people not coming to work after the second phase of the lockdown got over. This was partly due to fear and partly due to difficulties of travel, domestic responsibilities, or old parents at home. About 30 per cent households in India live with elders, or where at least one member of the family is above 65. These people have repeatedly been warned to keep their elders isolated. In small homes, this is difficult.
In addition there is the migrant crisis. After being unable to be with their families, many workers are heading home. It may be some time before they come back, and even then, all of them may not come back.
Third, credit will be a constraint. The government has eased liquidity and banks can give credit to their customers. However, there is an entire ecosystem of small firms who depend, not on the banking system, but on informal sources of credit. These are sometimes their suppliers or their buyers who give them working capital for purchase of raw materials or payment of wages. There are an estimated 64 million small firms in India.
The MSME package announced by FM Sitharaman is expected to give relief to 4.5 million of these. For the nearly 60 million others, adequate credit may not be available to restart production.
Fourth, travel could remain restricted, could become more expensive, and until the fear of Covid-19 remains, the impact on many sectors — like aviation, hospitality, tourism etc. — may last for a few quarters.
Fifth, consumption will take time to pick up. Incomes have been disrupted. There is uncertainty about future incomes. Until now, people were not able to step out to buy, and so, sales were stalled. But now expenditure may get postponed even after people are able to step out to buy.
Sixth, exports contracted by 60.3 per cent in April. Orders will be down until the rest of the world economy picks up. Exports depend on global demand and world trade. This is expected to be severely hit this year.
Seventh, investment was already in trouble before the Covid-19 crisis. It was going to be an uphill task to revive it. The increase in uncertainty and the difficulties of credit, labour and restrictions are going to make the investment climate worse. This could also pull down growth.
Impact on government revenue
Finally, the third big unknown is the impact the economic slowdown will have on government revenue. As I have argued before, tax revenue will decline and that leaves the government with limited fiscal space.
So far, in the economic package, the government has permitted people to delay tax payments. If the economy does not pick up, the government may need to cut tax rates, including GST, to put money in people’s hands. This may impact tax revenues further.
With the large number of unknowns, the Finance Minister’s economic package tries to push liquidity, encourage reforms and increase agricultural incomes. No doubt, more can always be done, but it is prudent not to use up all her ammunition in the first two months of such an uncertain year.
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