Tuesday, 1 March 2011

Dubious Data

I saw a news report the other day, which headlined a statistic that mortgage payments were now at their most affordable for a decade, accounting for on average 15.4% of households take home pay. Details of the story can be found here. However, like many stories relating to the housing market, the headlines belie a much more complex story.

For example, the BBC today has headlined, that the number of mortgage approvals in January rose by 7%. My first question was, 7% from what? Was it 7% from January last year, or was it 7% from December? In fact, its only be reading the story on the BBC website that you discover that it is the latter. On that basis, the figure immediately looks less impressive, because in December there was very little activity because of Christmas, and because of the weather. In fact, reading the story in more detail you find out,

“They increased to 45,723 in January from 42,719 the month before.

However, that was still below the average monthly figure for the previous six months.

Robert Gardner, Nationwide Building Society: 'Market is moving sideways'

And Richard Sexton of chartered surveyors E.Surv said the revival was probably misleading.

"The bounce in January could merely reflect catch up from a snow-bound December.

Taken together, January and December were the weakest two months for mortgage approvals since March 2009.

"The housing market is on shaky ground and likely increases in interest rates could be very damaging," he added.”

Last week there was a similar thing. The BBC ran a story that house prices had risen by 3%. But, it was only when you dug into the story to hear what Rightmove had to say, that you found out that this increase was an increase in ASKING PRICES, not selling prices, and that their spokesman said that people were setting themselves up for disappointment in the current climate by continuing to ask for unrealistic prices.

“Unwilling or unable todrop their asking prices to bargain basement levels, this helps explain why new sellers’ average asking prices remain broadly static year-on-year and are still following traditional seasonal ups and downs. Rises in interest rates, unemployment and more forced sales in the second half of the year could alter the landscape.”

The same is true in relation to the story about affordability. The survey would have to include people who have held mortgages for varying durations. Some of those mortgages would have been taken out on the purchase of houses 25 years ago. The nominal price of a house 25 years ago was only about a sixth of todays prices, and so the mortgages taken out on such properties, and the mortgage payments would likewise only be around a sixth of the mortgage payments on the same house now. Given that there must be more of these older mortgages than new mortgages, simply quoting this figure gives a very biased view of how affordable a new mortgage is for anyone currently looking to take one out. In fact, the situation is worse than that.

Mortgages taken out 25 years ago would have been either repayment mortgages – where the monthy repayment covers interest, and a proprtion of the Capital sum borrowed – or else an Endowment Mortgage, where the mortgage interest is paid, and a Life Insurance Endowment is taken out, which builds up to pay off the Capital sum at the end of the mortgage period.

Today, however, most mortgages are interest only mortgages, where no payment towards the Capital Sum is made, either as part of the monthly repayment, or as part of some other arrangement. Consequently, at the end of say a 25 year mortgage, the Capital Sum still remains to be paid-off. The result is that any figures comparing the situation in relation to repayments with that 20 years ago are not comparing apples with apples. The easiest measure of that is the fact that borrowers have had to resort to burdening themselves with ever higher multiples of debt to income to be able to borrow the sums they require. Although, there are complaints now about the requirement to provide reasonable amounts of deposit of around 25%, in fact 20 to 25 years ago, not only were such levels of deposit taken for granted, but mortgages would generally only be granted up to twice proven income. The fact that the Government – the same Government that talks about the problems created by too much borrowing – is now trying to get Banks and Building Socieites to lend to people who cannot raise reasonable amounts of deposits shows the problem they have.
The real problem, is that house prices are way too high, but the Government dare not take action to reduce them, because it would immediately hit much of its core vote. It would also mean that the fiction that is the Banks Balance Sheets would also be exposed, showing that it was not just the US that had a sub-prime problem.

The significance of that has been shown in Paul Mason's Latest Blog, where he shows the problems that Europe's banks have, and which is likely to erupt into a new Eurozone crisis in the next few weeks.
Add that into the fact that tens of thousands of refugees are streaming out of North Africa, many finding their way to Southerrn Europe, and the outbreak of increasing social unrest on the street of Athens, no doubt soon to be followed by Spain, Portugal, Italy, and France – not to mention potentially when they find that changing the Government has not solved the problem, Ireland – then as he says, the policymakers will soon be in need of Plans B, C, D,...

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