MACRO ENVIRONMENT

Macro Environment



Macro Environment

Question 1:

The UK is now experiencing a downturn. Nowhere is this more apparent than in the number of '50% Off' signs in shop windows. Meanwhile, the house price wheel of fortune has ground to a halt. This is in spite of strenuous efforts by the TV and media to keep it turning. According to the Nationwide, the average UK house price has now fallen over two successive months. Whilst, in local property supplements, the 'reduced price' labels have been multiplying for over 6 months.

The ailing Northern Rock bank remains unsold, apparently the victim of its own success. Its share price has fallen from a high of over £12 in February to under £1 in November '07. The Bank of England warns of hard times ahead, but talks less of its own contribution to today's unsustainable debt. The bank dropped the UK base rate repeatedly after the Dot Com crash of 2000. At July 2003 it was down to 3.5%, by which point house price inflation (12 monthly) had escalated to 20% - its highest level since the 1989 crash. Predictably, the falling base rate prompted a resurgence of the borrow and spend mentality. In fact, by 2003 cheap loans were being offered with such wild abandon that just about every adult believed they could take on an overpriced property or, perhaps, a buy-to-let portfolio.

Recently, almost overnight, it seems that the media has been given the green light to openly expose the flip side of the equation. All of a sudden, the worry isn't just about the cost of Home Information Packs, or rising mortgage arrangement fees, or the availability of shared ownership schemes for key workers. The worry isn't even about the record numbers of people seeking debt counselling.

The fear now is that many people simply won't get a mortgage in 2008, and many of those on a 2 -3 year introductory deal will be crushed by the jump in repayments when their current deal expires. Fear of job losses is also rising. According to Lloyds TSB's research, the number of consumers feeling insecure about their jobs is at a six month high. Employers who rely on a buoyant house market (builders, building suppliers, estate agents, DIY stores) must all be revising their outlooks as first time buyers take fright and developers retreat. As job losses begin, mortgage repayments will falter and, with no benefits safety net left to fall back on*1, repossessions will result.

As the media belatedly unveils the downside of the boom bust cycle, the headlines now turn on stories of imminent bankruptcy amongst mortgage repayment insurers, of property fund withdrawals being suspended, of financial institutions seizing up as each one looks to reduce its own exposure to risk by refusing loans to others.

Lack of lending between banks has forced central banks in the US, UK and Europe to intervene on an unprecedented scale, offering the equivalent of hundreds of billions of dollars in 'emergency' loans to bail out ...