EU proposed Directive on mortgage credit: One step forward, two steps back

I agree wholeheartedly with the CML in their press release about national mortgage markets being highly idiosyncratic. Indeed the FSA initial regulatory regime was based on disclosure to allow borrowers to understand what they were getting and then compare one lenders offering with that of another – just like the EU are now suggesting.

We know that in practice this doesn’t provide the whole solution. Seems to me that we are ahead in our thinking in the UK and this EU directive will serve to complicate and confuse……

We are moving backwards I fear!

So after the budget what next?

Delivering a budget of any substance when you have no money in the coffers is tricky to say the least. Therefore it is not surprising that, in my view, the budget was somewhat a damp squib. Balanced, politically astute and certainly some headline grabbing initiatives but in reality nothing to help get the market back on track - something the Government recognise themselves given that the OBR has downgraded growth assumptions again from 2.1% to 1.7% this year.

So after the budget, what next? Interest rates are certainly something to watch with care. The inflation target of 2% was reconfirmed Wednesday. Whilst recently the majority of MPC members voted for no change, two voted for a 0.25% rise and one, arch hawk Andrew Sentence, went for 0.5% increase.

Whilst there are those economists who say that putting rates up will unquestionably serve to reduce inflation, I would like to declare myself to be, in their view, an economic illiterate by saying that I don't agree with them. Why? Well I can see a risk of higher rates causing inflation to rise by increasing costs - remember 'cost push' inflation? How will putting rates up in the UK head off inflation which has been caused by tax rises, higher energy and commodity costs?

I have to accept that in the case of inflation triggered by a weak pound, higher rates will help by making the UK a more attractive home for foreign investment chasing higher returns but at what cost if that causes the economy to stumble further and economic activity to reduce yet again?

Just how many times can the Government reduce their growth forecast I wonder?

A Painful Process

Looks like the austerity measures are finally starting to kick in. It’s only now that the real effects of Government’s action to reduce the deficit are beginning to be felt. And boy, does it hurt.

Street cleaning and rubbish collections are to be reduced, some 500 libraries and hundreds of sports centres are set to close along with thousands of services for disabled, the mentally ill and elderly as authorities are obliged to slash their budgets by as much as 25 per cent this year. The fallout will have a huge impact on jobs with suggestions that at least 150,000 jobs will be lost in local authorities in the next two to three years (total 410,000 public sector job cuts).

So the pain begins. And it could take a number of years to flush this hurt through the system.

My question is what will be the impact on wider unemployment statistics? Previously Mervyn King suggested that the private sector would take up the slack and would be in a position to fill vacancies from refugees from the public sector. Sadly, as I’ve said before, I don’t think this looks feasible. The CBI concur with my view and suggest that the unemployment rate will jump from 7.9 per cent to 8.4 per cent as the private sector struggles to offset public sector job losses as well as providing for new entrants into the labour market. Its summary is that unemployment will not start falling for two years.

Clearly this is worrying. Especially since many analysts are suggesting that the economy will not grow as quickly as the OBR have suggested raising fears of a jobless recovery.

Let’s hope the Government take notice.

What now for first-time buyers?

In issue 23 of News and Views published by the CML it was suggested that the contraction in UK mortgage lending since 2007 has been the most severe on record. Furthermore, between 2007 and 2010, as many as 800,000 potential first-time buyers had been effectively frozen out of the market. Lending criteria has tightened significantly for the first time buyer with the average LTV for this group of borrowers falling from 90% to 75%.This trend seems set to continue with the major lenders choosing to concentrate on less risk adverse borrowers who have greater equity in their property.

Meanwhile, rents are continuing to be pushed up as more people turn to renting a home instead of buying one. RICS said that demand from would-be renters was rising while the supply of new homes to let was falling.

So what is to become of this disenfranchised group? Are they doomed to languish in their parents’ homes until conditions improve? Is getting the deposit they so desperately need now a matter of long-term saving or pleading for handouts from kindly relatives?

It seems to me that more needs to be done to help this group of borrowers. Traditionally their role in establishing a healthy mortgage market is crucial so they shouldn’t be ignored. If lenders are doing their job and assessing affordability on an individual basis then surely some tranche of their lending allocation can be provided specifically for first time buyers. Then again, market share is no longer the problem so why should they want to do this without incentive?

Maybe the market needs to think again.

Irish blogging - we're all doomed!

So what is the true state of affairs with Ireland? A week ago we were being assured that they had no need of European support and here we are now with a near certainty of a €90bn bail-out. So what’s changed?


Well I guess nothing except that a week ago the Irish Government were still trying to avoid European help at a country level and were trying instead to point the bail-out directly towards the banks. That way they would have been angling to avoid European interference with fiscal and political policy. But now this looks to be in jeopardy.


The Irish have fought so hard over the years to gain independence and with the lure of wealth and phenomenal economic growth; Ireland just took what was available from Europe and got behind the roaring success that became known as the ‘Celtic Tiger’. Who can blame them? So much did this extend to their thinking about the future that even when the Euro was suggested they didn’t hesitate – they were happy to join the band of successful European brothers which left the UK outside and looking a little isolated.

I suppose I’ve always had reservations about the Euro. How can you have monetary union if you don’t at some point also have control over fiscal and political policy on a centralised basis? What about the ‘one-size fits all’ monetary policy that would treat France and Germany the same way as much smaller and more fragile, less developed economies – which it now turns out includes Ireland? Well I guess we’ll just have to wait and see.


So will there be a bail-out of Ireland? I guess the answer is yes but I fear that until the European review has been completed we just won’t know if €90bn is enough. Are they hiding the true state of their situation and what if they need more? Once Ireland is sorted Spain and Portugal will likely need support and their economies are on a different scale entirely. Where will it stop?


I fear that we still have a long way to go in this but although the stock market has rallied on the back of Irish news this morning (but has since fallen back) I still feel profoundly uneasy. The future of the Euro is far from assured right now.

In the words of Private Frazer from Dad’s Army it feels like we are all doomed!

A concern for us all

On the face of it, the Bank of England presented a pretty positive growth outlook albeit inflation remaining above target for the next year. And I believe Mervyn King was right to talk about the fragility of the economy and how the world economy faces ‘difficult and dangerous’ times particularly if the G20 continue to focus on protectionist issues rather than Global concerns.

So far so in agreement.

Where I have major concerns is around Mr King’s comments on employment and how this will pan out in the near future. He states that he believes the private sector could provide enough extra jobs to offer to those made redundant. He says: ‘It is clearly feasible and not at all unreasonable to see a shift in employment between the public and private sector’.

Well I just can’t see this happening. Looking at the facts, we already have a record number of people forced into part time jobs (1.13m according to the latest figures from the ONS). Added to this statistic is the rise in the long term unemployed to its highest level for 13 years. If this is what the situation is like now, you have to ask yourself how things are going to be when the austerity measures kick in and the real hurt begins.  Research by PWC suggests that spending cuts will trigger a wave of redundancies in public sector organisations and the private sector businesses that relied on contracts in the state sector. The report suggests that nearly 1m extra face unemployment due to public service cuts. To think that the private sector can pick up the slack just doesn’t seem to be feasible in the short to medium term.

Of course I wouldn’t mind being proved wrong…

Trade bodies - how to make friends and influence people

Trade body announcements and other industry commentary came in thick and fast yesterday starting just after 6am with Michael Coogan’s live interview on Radio 4’s Today programme discussing the latest CML research. This shows, according to the CML, that the FSA hasn’t done its homework properly in relation to responsible lending proposals within the MMR and the potential impact on the market if the proposals were implemented.  

I confess at this point I have not been through the research fully and so will resist the temptation to discuss the CML’s conclusions and whether I agree with them. But wherever you stand on this issue I wonder whether the industry is showing itself in the best possible light. What are trade bodies trying to achieve? The FSA have come out with their consultation paper and have welcomed input from the industry. We can either do that discretely with the FSA who, in my experience welcome constructive comment, or we can be shrill and publicly critical about our views. Which do we think will be the most effective way of working with the FSA I wonder?  

I know which I prefer and recommend and I suspect I know which will have the most impact in ensuring that proportionate responses are made and points taken on board within the final shape of regulation. I think trade bodies are at risk of damaging the industry and making themselves ineffective and redundant if they aren’t careful.  Watch this space!