The reason that these two sectors are key barometers of economic health is because of the importance they play in the aspirations of the UK citizen. More people in the UK are homeowners, as a percentage of population than in any other G7 country and by some margin and historically the annual holiday goes back as far the Victorian times.
Indeed the words an "Englishman’s home is his Castle" is part of our psyche and nearly every young couple look to buy their own property. The same goes for an overseas holiday, our love affair stretches as far back as the early sixties when packaged holidays to Spain were first introduced that more or less guaranteed two weeks of sun.
Taking home ownership first, for many years the formula for granting a mortgage in the UK was two and a half times the annual salary of the main earner plus one of the spouse or partner and at least a 10 per cent deposit. Indeed some banks or building societies would not even lend to you if you were not married.
This more cautious approach meant that house prices only went up with income, until financial deregulation really took hold in the nineties whereby the more shady financial houses business model was to lend 100 per cent mortgages to nearly any one who wanted one, with ratios rising as high as 6 times annual income.
As you would expect this sudden infusion of buyers saw house prices rocket. Put simply, as long as house prices kept rising and people wanted to borrow it did not matter if they defaulted, as long as their was enough liquidity in the system to keep parcelling off chunks of these mortgages. The whole premise of this model depended on rising prices and liquidity with little or no thought to the customer.
The worst cases of this were seen in the USA in what is termed the Sub Prime Market, but many finances houses in the UK followed suit such as Northern Rock and the more cautious were forced to relax their terms just to stay competitive.
This model was basically immoral in lending to people whose income was primarily devoted to paying a mortgage they plainly could not afford. Worst still when the time bomb exploded these people lost their homes and still had outstanding mortgages and took the route of bankruptcy to free themselves.
Two things have resulted from this disaster; the finance houses are now demanding much higher deposits as a buffer against default and falling prices and more sensible income ratios. This has taken many first time buyers out of the market and even those who could manage these requirements are fearful of buying in case prices fall further. We currently have the lowest bank rate ever in our history and even this has been unable to stimulate demand.
Result construction remains on its knees and is likely to do so for the foreseeable future.
Previous recessions have all caused increasing unemployment and pain to many individuals but this time around it is governments that have been directly effected. They have spent billions propping up the banking system by providing liquidity to the market and this printing of money has resulted in huge national deficits that have to be paid back.
Normally a Government would spend to stimulate the economy but the opposite is currently happening with a raft of cost cutting throughout the public sector to reduce the debt. Whilst the UK is officially out of recession the holiday market has seen no pick up because the fear of unemployment remains and more people have decided to take shorter trips in the UK rather than the more expensive foreign trip.
UK passenger traffic is down by about 20% on 2007 and whilst there has been a slight recovery in business travel towards the latter end of 2010, leisure traffic is still down. To make matters worse rates for Aviation Tax about to go up in the March budget and the recent flight supplements imposed by nearly all the major airlines to cover the recent rise in the oil price, 2011 is already looking bleak and holding on to last years figures would be a good outcome.
Indeed the words an "Englishman’s home is his Castle" is part of our psyche and nearly every young couple look to buy their own property. The same goes for an overseas holiday, our love affair stretches as far back as the early sixties when packaged holidays to Spain were first introduced that more or less guaranteed two weeks of sun.
Taking home ownership first, for many years the formula for granting a mortgage in the UK was two and a half times the annual salary of the main earner plus one of the spouse or partner and at least a 10 per cent deposit. Indeed some banks or building societies would not even lend to you if you were not married.
This more cautious approach meant that house prices only went up with income, until financial deregulation really took hold in the nineties whereby the more shady financial houses business model was to lend 100 per cent mortgages to nearly any one who wanted one, with ratios rising as high as 6 times annual income.
As you would expect this sudden infusion of buyers saw house prices rocket. Put simply, as long as house prices kept rising and people wanted to borrow it did not matter if they defaulted, as long as their was enough liquidity in the system to keep parcelling off chunks of these mortgages. The whole premise of this model depended on rising prices and liquidity with little or no thought to the customer.
The worst cases of this were seen in the USA in what is termed the Sub Prime Market, but many finances houses in the UK followed suit such as Northern Rock and the more cautious were forced to relax their terms just to stay competitive.
This model was basically immoral in lending to people whose income was primarily devoted to paying a mortgage they plainly could not afford. Worst still when the time bomb exploded these people lost their homes and still had outstanding mortgages and took the route of bankruptcy to free themselves.
Two things have resulted from this disaster; the finance houses are now demanding much higher deposits as a buffer against default and falling prices and more sensible income ratios. This has taken many first time buyers out of the market and even those who could manage these requirements are fearful of buying in case prices fall further. We currently have the lowest bank rate ever in our history and even this has been unable to stimulate demand.
Result construction remains on its knees and is likely to do so for the foreseeable future.
Previous recessions have all caused increasing unemployment and pain to many individuals but this time around it is governments that have been directly effected. They have spent billions propping up the banking system by providing liquidity to the market and this printing of money has resulted in huge national deficits that have to be paid back.
Normally a Government would spend to stimulate the economy but the opposite is currently happening with a raft of cost cutting throughout the public sector to reduce the debt. Whilst the UK is officially out of recession the holiday market has seen no pick up because the fear of unemployment remains and more people have decided to take shorter trips in the UK rather than the more expensive foreign trip.
UK passenger traffic is down by about 20% on 2007 and whilst there has been a slight recovery in business travel towards the latter end of 2010, leisure traffic is still down. To make matters worse rates for Aviation Tax about to go up in the March budget and the recent flight supplements imposed by nearly all the major airlines to cover the recent rise in the oil price, 2011 is already looking bleak and holding on to last years figures would be a good outcome.
No comments:
Post a Comment