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Average house price in UK drops below £150,000

[ Posted February 28th, 2009 ]

In the month of February UK house prices fell another 1.8%. This has pushed the cost of a home below £150,000 mark. According to Nationwide building society the average property price in UK is now at £147,746 which is £31,612 less than a year ago.

The chief economist at Nationwide Fionnuala Earley says ‘The dramatic cuts in interest rates have improved the affordability of houses, but it has yet to increase the transaction activity to sufficiently boost the house sales, or stop the slide of house prices falling further’.

However, this was in sharp contrast to the figures reported by Halifax last Month that showed house prices rose by 1.9% in January. Seema Shah of Capital Economist says ‘These figures reveal a sharp drop in the house prices and dash any hopes that the housing market will start on a stronger footing in 2009. Unfortunately if this trend continues the house prices could drop around 30% below their peak by December.’

This has the potential of causing a mammoth disaster as millions of home owners fall into the trap of negative equity. According to various figures up to 5 million people could be paying mortgages which are higher than the value of their homes. It has been estimated that as much as 3.8 million home owners are facing a serious decline in the value of their property compared to the amount of borrowing by the end of the year. If house prices drop by another 10 to 20% by the end of the year then another 1.2 million home owners could be facing the prospect of negative equity.

However, according to the institute of chartered surveyors, some recent data has suggested that the new buyer enquiries have increased for the last three months in a row. But analysts warn that these enquiries need to be converted into actual sales to have any impact on the sluggish UK housing market.

On a positive note, a third of UK borrowers have seen their monthly mortgage payments reduce by an average of £240 since the interest rates have started falling. As the interest rates have dropped from a high of 5.5% at the end of 2007 to 1% this month, the average monthly mortgage payments have fallen by a third, leaving home owners with extra cash in their pockets.

UK national debt at all time high

[ Posted February 22nd, 2009 ]

 The falling tax revenues and bailing out of banks has put Britian’s balance sheet in a precarious postsion. Lloyds and Royal bank of Scotland are now considered as public sector entities by the ofdfice of National Statistics. This has added $1.5 trillion of liablities to the country’s balance sheet.

In Jnauary, the treasury reported that the tax receipts took a hit dropping 10% from last year. This amounted to only £54 billion for the treasury in a month which is suppose to be one of the best for collecting tax revenues. The decline in the tax income was acrosss the board. The VAT was down 10% whereas the corpoate tax revenues were down 20% from last year. As a result the repayment of debt for the month of January was smallest by the government in the last 14 years.

An economist, Howard Archer at Global Insight says "Cosidering the rate at which the British public finances are deteriorating, it is frankly anyone’s guess as to how high the public deficits may reach in the next couple of years".

Other economists fear that the Treasury chief Alistair Darling ability to deliver further stimulus to the British economy will be limited, as he would have to further increase his already massive borrowing forecasts for the coming years. As concern mounts over the state of public finances in Britain, the value of government bonds and gilts fell, sending yields higher.

In US there is also a debate raging about classifying bailout recipients as public sector entities. The Obama administration is expected to move the debt of mortgage gaints Fannie Mae and Freddie Mac to the federal budget whereas the Bush government kept Fannie Mae and Freddie Mac off the federal books. This would add huge sums to the federal deficit.

According to government figures the net borrowing of the public sector in the fiscal year to Jnauary stood at £67.2 billion, compared to £23.1 billion in the year-earlier period. The is the highest figure since records began in 1993.

The government spending in the month of January totalled £45.5 billion, up 6.6 per cent from £42.7 billion the previous year. This includes an increase of £13.5 billion in social benefits, such as unemployment insurance. On of the biggest costs in public borrowing has been the attempt to bail out the banking system. This impact was underscored by the classification of Lloyds and RBS as public sector entities, as Britain now effectivly controls the two banks via government bailouts.

According to the statistics office the current debt load of the government is at 1.5 trillion which is equal to the country’s gross domestic product. But the government liabilities are likely to more than double this figure. However, Moody’s Investors Service has said that this will not effect Britain’s triple-A credit rating. But as the British economy slides deeper into recession and the government’s efforts appear inadequate, many economists expect the government would have to make even more spending announcements.

UK House building falls to record low

[ Posted February 20th, 2009 ]

The government has plans to build 2m new homes by 2016  but this is threatened by the sharp decline in house building across UK. The new housing projects have fallen to their lowest level since the records began in 1980.

Analysts believe that as a result of fewer houses being built, the government is unlikely to achieve its target of building 2 million homes by 2016 and 3 million homes by 2020.

The main reason for the sharp decline in new house builds is the current credit crunch which is making it impossible for the developers to get the finance that they are looking for. The banks have become far too strict and cautious when lending and have really tighten up their criteria. If we continue at the current level of house building then there would be around 1.2 to 1.3 million homes by 2016 as opposed to 2 million.

As house building companies found it harder to get finance from banks, the new house building projects began to fall in the first half of 2007 and the decline continued ever since. This was further aggravated by a record fall in mortgage approvals and buyers being pushed away due to falling house prices. The Council of Mortgage Lenders has reported a 52% drop in mortgage lending over the last year.

According to official figures, the number of new houses being built in England fell by around a quarter during the last three months of 2008. The figures from the Department of Communities and Local Government shows the number of new homes being built in the final quarter of last year was, at 16,310, its lowest level since comparable records began in 1980. This figure was 27% lower than in the previous quarter and 58% below the number of new houses started during the last quarter of 2007.

The government is hoping to build around 240,000 net new homes every year until 2016. However, even in 2006-07 when there was no housing crisis, there were only 200,000 new homes built, which is far less than the stated target of 240,000 new homes every year.

At the peak of the housing boom, it was estimated there were around 300,000 people employed in the industry according to the Home Builders’ Federation. Since then the industry has lost around a third of its work force.

However, there seems to be some room for optimism as in recent weeks, it has been reported that there has been an increase in the housing market activity with a rise in new buyer activity. The government needs to convince the banks to start lending to home buyers, house builders and small businesses in order for the economy to pick up again. 

UK gambles with another Bank Bail-out Plan

[ Posted February 6th, 2009 ]

Fresh efforts have come from the government to help banks recover from the effects of credit crunch and in turn kick start the British Economy. As part of the Bank Bail-out plan, insurance programs will be rolled out to banks to ensure they stop losing money on bad debts, which is seen as the starting point of the credit crunch.

The government initiated insurance plans will protect banks against bad credit and bad mortgage debts. An insurance program will be set up by the government to ensure that banks assets are not under risk anymore. The hope is to help banks to start lending to individuals and businesses which is essential for the recovery of the economy. The Prime Minister Gordon Brown is very positive that this bail-out plan will be a turning point for the recession stricken British economy. Under this new insurance scheme backed bail-out plan, banks have to work closely with the government. The treasury will set up insurance programs that will meet up to 90% of the additional loss suffered by the banks due to bad debts.

By helping banks to recover faster from their losses and protecting them from further loss, the government hopes that they can resume their normal business. Taking insurance from the government will also bind the banks legally to lend more to individuals and businesses. The government is encouraging the banks to start lending to businesses as well as individuals under the new bail-out plan. This will ultimately help small businesses and individuals who are finding it extremely difficult to get any credit these days. However, the banks will be paying for the insurance though not in the form of shares.

Bank of England, which was buying assets only from financial institutions and other banks so far, will be able to now buy assets from all types of companies directly. It will be able to buy assets for up to £50bn. The acquisition of the assets will be done by a subsidiary company that is set up for this purpose. However, the bank’s executive will still be the one who will decide on the companies from which the assets will be bought and the nature of the assets to be bought. Corporate bonds are included in the list of assets and this makes it possible for companies to borrow money from the Bank of England directly.

There are mixed opinions about the latest bail-out plan from the government. For instance, Vince Cable, the Liberal Democrat treasury spokesperson says that nationalising the entire banking sector would be the ideal solution rather than offering insurance schemes to encourage banks to lend more. He reckons this will be a very slow and long winded process to recovery. Its more of a gamble then anything else.

Under this insurance based bail-out plan, banks or financial institutions with over £25 billion of eligible assets will get first preference for the insurance program. Furthermore, there was an announcement from the government that it is increasing its stake in RBS by 12%. This takes the figures from 58% to 70%.

 
 
 
 
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