It is Obvious

Chris Rick has got altogether too much to say

My home is my castle

Posted by chrisrick13 on April 4, 2011

It is obvious: we borrowed a lot in a rush.

In the 10 years before the credit crunch there was £328bn of what is called equity withdrawal.  This is people taking money out of the part of the house that they own (rather than the bank) and spending it.  This is a boost of 9% after tax to household incomes.

No more boom and bust eh?  That must have been obvious to everyone…including the chancellor of the Exchequer.  This spending level had to stop, in the worst case, when all the equity had been withdrawn, or earlier if the we collectively saw the error of our ways sooner.  It is the very definition of a boom and bust.

I know it is a deep topic, but the value of the house you live in is actually only what someone is prepared to pay for it.  There are not many around now can afford to pay the prices that we all believe our houses are worth, let alone want to.

This last year though, we have been paying our mortgages off – the reverse of equity withdrawal.  This is not because we feel that houses are good things to put our money into.  It is because we are collectively scared witless that we won’t be able to afford the mortgage soon, either through the loss of a job, or the rise in the cost of the mortgage.  We are doing that at the rate 2.7% of our income.

So we borrow for 10 years and look like taking 30 years to pay it off.  By any estimate I have seen, that is going to run into the peak oil problem at the very least, when we will be under a lot of pressures of a different kind.

However those numbers can be viewed in another simplistic light.  The money borrowed was about £30bn a year.  The money being paid back is about £25bn a year.  That means about £55bn a year not slopping around in the economy.  That is in excess of 3% of GDP…so where is the growth going to come from that we need and has been promised?  Or, with my cup half full, it is amazing the recession is not a lot worse.

It is obvious: we borrowed a lot in a rush and we are planning on paying back at our leisure…or leaving it to someone else.

One Response to “My home is my castle”

  1. Bill said

    It is clear to all that tough economic decisions need to be made. It is also clear that if these are made AND acted upon then the party in power will become unpopular and possibly (probably) lose the next election. It would seem that the current Tory policy is to announce lots of tough measures see what the public reaction is and then retreat from the most damaging (in terms of votes).

    While they are trying to enact some savings in government departments these are being felt as cuts to services rather than in admin/management which is where it should be (for reasons I’ve bored you with before). The ministers need to take control and not laze back and let the Sir Humphrey’s subvert their will. Fat chance!!

    Bill

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