Thursday, October 16, 2008

Trends in Personal Lending

The graph left comes from page 30 of the FSA's Financial Risk Outlook report, which was published in January 2008 (though it is 70 pages long, it's well worth a read, as it is quite prescient).

For me the most interesting thing has been a collapse in credit card lending since 2005 (mainly due to lenders withdrawing 0% deals). Unsecured lending also drops. If the extreme lending in 2003-2004 was unsustainable, so too is the lack of lending in 2008. By contrast, a return to 2007 lending means a return to very prudent lending indeed, compared to the last fifteen years.

8 comments:

Anonymous said...

It hasn't actually collapsed though, has it? It's just not growing much. As, presumably, there is a degree to which debats are paid off then a 4 - 5% annual growth rate seems ok. 10% growth isn't though!

DevonChap said...

So are you suggesting that we had imprudent lending over the last 10 years?

This is an intersting link. Especially worrying is the increase in mortgage arrears which lept in 2006 (the latest figures they have). With the durnturn in the economy and the banks keen to get their cash we could see a horrible rise in repossessions. Alternatively the government uses its new control over banks like Lloyds and RBS and prevents repossessions costing the taxpayers money (in the form of bank profits forgone) and moral hazard in that solvent taxpayers who kept up thier repayments will be bailing out those individuals who over-borrowed to buy houses they couldn't afford.

snowflake5 said...

devonchap - some of the lending since 1994 has undoubtedly been imprudent - and before people try to blame the government, I would like to point out that credit controls were abolished by the Tories, and it was up to lenders to make sure they were managing their risk properly.

It's notable that even in the current crisis, companies like Barclays think that the govt requirements to raise their capital are "temporary" and that they will be able to get back to their old ways soon! Deep denial, and an illustration of just where the blame lies for the lending practices.

Regarding repossessions - it is dependent on unemployment. As long as people stay employed they'll continue to pay their mortgages. We will have to see how this plays out.

Regarding your "claim" that the Labour govt will prevent repossessions through control of HBOS and RBS. What is this based on? Wishful thinking? Blind prejudice? The govt controls Northern Rock too, and the emphasis has been on getting taxpayers money back rather than preventing repossessions. Why are you ignoring the actual evidence of the last year of how the govt handles nationalisation? Because it is inconvenient and doesn't fit with your fantasies?

The govt will try to support the economy through macro-economics - by maintaining public spending (and maybe increasing it a bit until the world economy stabalises), not by messing about with the minutiae of how banks are run.

DevonChap said...

I didn't say the government would use their influence to prevent repossessions, just they might. It is your blind prejudice of my position being displayed here, not mine.

We have seen just this week pressure groups decrying Northern Rock for the number of repossessions it is carrying out, forgetting that since Northern Rock had a more "sub-prime" mortgage book then many other lenders it is not surprising that they are getting more defaults, so more repossessions. There will be political pressure on the government as the downturn bites into the real economy from within and without the Labour Party to use the government control to keep people in their homes at all costs. We shall see how strongly the Government resists that. So far they have commendably let Northern Rock run itself.

The political reality of governing (and this is not a party political point) is that governments want to be seen to be doing something. Action, rather than inaction is always preferable in today’s news climate; even if the thing they do is worse than doing nothing for the problem they are trying to address. I fear that with months of bad economic news ahead and little the government can do to fix the economy in the short term, they will be tempted to take action such as leaning on the banks to reduce repossessions for an easy headline. I hope they don’t but I don’t have your faith they won’t.

As to lending practices. It is the government’s job to regulate the control of money supply. Saying that the Tories scrapped credit controls in the 1980’s after Labour had 10 years to bring them back if they so wished is passing the buck. Personal debt as a percentage of GDP was 60% when Labour came to power (It had remained at about 60% from 1993 to 1997). Now it is 100%. Unless you believed that there would never be another economic slowdown that level is unsustainable and government could have slowed the growth by imposing higher capital regimes on the banks, or minimum deposits for house purchases or all manner of other small restrictions (even just saying people shouldn’t borrow as much would have been a start). Sadly the banks were providing too much money in tax revenues to pay for government spending to worry about the effect on the wider economy when the music stopped. Now the music has stopped and a lot of misery is going to be caused to those people who will lose their homes or go bankrupt. The sharp rise in unemployment does not look a good sign for them.

snowflake5 said...

Devonchap - I accept that pressure groups and media will try to pressure the govt to be light on repossessions.

What I am trying to point out is the government's actual record in resisting these siren voices. They've appointed a new head of Northern Rock, tasked him to get the org back on it's feet and repay the £3bn the govt lent it, and have left him to get on with it and make whatever decisions he has to, to achieve his objectives. And they've been steadfast in not giving in to all the special pleaders.

Our govt isn't a pushover by any means (just compare the terms of the money provided to UK banks, which incentify the banks to buy out/repay the taxpayer ASAP, with the US version, which incentifies their banks to use the taxpayer and take him for a ride).

Regarding your points about credit - you forget that many of the things you suggest were tried in the 70's, and didn't work. In particular constantly changing banks capital requirements destabalises them, as they find it hard to plan from one year to the next.

The government did actually do many small things to try to slow the market down - Brown abolished MIRAS in April 2000, when it became clear that some people thought that the tax relief was incentive to load up on mortgage debt and never repay/overpay it.

He then introduced stamp duty of 3% on homes over 250k and 5% on homes over 500k in 2003, when it became clear that big bonuses in London were creating a top-down bubble in housing - the classic theory is that if you increase transaction costs, people stop trading houses constantly as though they were shares and instead increase the length of time they stay put (and pay down the mortgage debt during the period they stay put). That slowed the market for a few months.

When the market resumed it's upwards trend Mervyn King made a famous statement in June 2004 where he stated that house prices would fall. His words managed to slow the market for all of six months.

The govt then introduced HIPs, which also slowed the market down for a few months.

So you can see the govt and bank acting in relay, each trying various things, which each had a short-term effect in slowing the market. You could argue that without all these efforts, our housing market would have been even higher - each pull back was a pause where people's earnings had a chance to catch up and some debt was repaid.

BTW - the Tories opposed all the govt efforts - they opposed the abolition of MIRAS, they opposed introducing stamp duty of 3% on homes over 250k, they opposed HIPS - they in fact thought that everything and anything that slowed the housing market was bad. And then Cameron appointed arch property cheerleader Kirsty Allsop as his property tsar. Tells you everything about Tory policy doesn't it?

DevonChap said...

Interesting you claim HIPS was an attempt to slow the housing market when the government introduced it as a way to make buying and selling houses easier. Either you are wrong in their intention and why they introduced HIPS ended up slowing the market unintentionally (for which the government can therefore be hardly given any credit for) or they were lying as to the reasons for brining HIPS in Which is it? Liars or incompetents?

snowflake5 said...

HIPs were actually primarily introduced for green reasons - energy ratings etc.And the government made this clear at the time.

But all transaction costs help slow down the market.

Most home buyers start off sensible and work out an amount to borrow they can afford. Then they are taken round houses, told that they have to bid up or lose the house, they fall in love with the property and excitedly spend 20k, 30k, 40k more than they were intending. Only it doesn't seem real to them. It doesn't seem like money they are paying or borrowing with interest, it seems like money that the lender is giving to them, and the more they are "given" the happier they are.

However stamp duty is something they have to "pay" and in cash too. It stings and pulls them up short, even though it is way smaller than the amount they are borrowing for the house. Ditto with HIPs, ditto with solictors costs.

Anything that makes the buyer or seller pause is a good thing. People shouldn't "trade" houses each year, increasing their debt each time - it's a recipe for disaster. They should buy, stay put for several years, during which time they pay down debt and the mortgage outgoing reduces relative to income. That way they stand a chance of reaching middle age with their finances in order.

DevonChap said...

I agree that people shouldn't move house every year. Nobody said they should.

HIPS of course was meant to lower the cost of moving since the plan was for the survey commissioned by the seller was to replace that done by the buyer. Of course as was obvious when the idea was floated the mortgage companies were going to insist on surveys for their valuation purposes so it was just an extra cost until that part was watered down.
I'm sorry but an extra cost imposed by government incompetence does not gain any marks. Only considered policy, not cock up, gains credits and justification for another term in office. At present Labour don't serve one and bleating about how the opposition didn't think of everything when they don't have the resources of the civil service behind them is just a symptom of a lost argument on your part.