Who should we really blame for the current crisis? Selfish bankers, regulators or borrowers that took a loan that they cannot repay?
Probably it is a mixture, bankers will have been the ones with the highest awareness that some of the borrowers will struggle with their loan repayments, regulators have not identified what has been happening to the property market and borrowers have been rushed into something they couldn’t afford, but did because everybody else did hoping that the increase in prices would last forever.
I believe one of the factors having influenced the borrowers in the UK was the pension scheme. During Mr. Browns chancellor period he has raised the taxes on pension schemes to classify them as earnings, setting back the amount that would be left over at the end.
As in many countries we have experienced an ageing population struggling to have enough caretakers for our pensioners, while less people are paying taxes. Lower birth rates and less caretaker supply has made the pension system more expensive to the state, causing the pension payments to drop, making life more difficult for pensioners. As we grow up and start thinking about the future, by the late 20’s or early 30’s most of us will start thinking about saving money to help us when becoming pensioners. By knowing that the state cannot take sufficient care, we will seek alternative investments, such as property and other alternatives.
The huge demand for property has over the years built a bubble on house prices. As salaries did not grow at the same rate as house prices, theoretically demand for property should have slowed down. As we know from economics, large profits will attract competitors. The more competitors in an industry the lower the profit margins will get. The way to stay competitive and keep lending money was to take higher risks.
Several years ago banks used to lend approximately 3 times the salary, say if somebody earned £40,000 the bank would have lent up to £120,000 to purchase property. The bank would also have demanded the borrower to pay between 20 and 30% of the investment, showing liquidity and reducing their overall risk, in the case of default. In the last years I have received adverts from HSBC, lending up to 4.5 times the salary and 90% of the investment. In this case the bank would have allowed me to purchase a home at around £180,000 these days while only having 10% of the investment saved up.
Essentially this would only leave less spending money as more had to go towards mortgage payments, which is one of the reasons why the standard of living in especially London is not among the top cities in the world, apart from the rich who do not need to worry about the markets as much.
Additionally our basket of goods does not account for rent or the cost of mortgages. This means that what most people of the working population probably have to pay for is not considered in the cost of living, and as most of us can probably figure out, the two components will take up a large percentage of income.
Personally I believe this is the government turning a blind eye to the property market. Property has been a hot topic in the UK and especially London over at least the past 10 years and yet the government has not decided to include it into the CPI, which should have given us much higher inflation rates and could have been an indicator to the credit crunch. Of course, it would have meant more explanations from the chancellor to what is required to tackle inflation and made interest rate policy even more difficult, but we may not have ended up with such a crisis.
Probably it is a mixture, bankers will have been the ones with the highest awareness that some of the borrowers will struggle with their loan repayments, regulators have not identified what has been happening to the property market and borrowers have been rushed into something they couldn’t afford, but did because everybody else did hoping that the increase in prices would last forever.
I believe one of the factors having influenced the borrowers in the UK was the pension scheme. During Mr. Browns chancellor period he has raised the taxes on pension schemes to classify them as earnings, setting back the amount that would be left over at the end.
As in many countries we have experienced an ageing population struggling to have enough caretakers for our pensioners, while less people are paying taxes. Lower birth rates and less caretaker supply has made the pension system more expensive to the state, causing the pension payments to drop, making life more difficult for pensioners. As we grow up and start thinking about the future, by the late 20’s or early 30’s most of us will start thinking about saving money to help us when becoming pensioners. By knowing that the state cannot take sufficient care, we will seek alternative investments, such as property and other alternatives.
The huge demand for property has over the years built a bubble on house prices. As salaries did not grow at the same rate as house prices, theoretically demand for property should have slowed down. As we know from economics, large profits will attract competitors. The more competitors in an industry the lower the profit margins will get. The way to stay competitive and keep lending money was to take higher risks.
Several years ago banks used to lend approximately 3 times the salary, say if somebody earned £40,000 the bank would have lent up to £120,000 to purchase property. The bank would also have demanded the borrower to pay between 20 and 30% of the investment, showing liquidity and reducing their overall risk, in the case of default. In the last years I have received adverts from HSBC, lending up to 4.5 times the salary and 90% of the investment. In this case the bank would have allowed me to purchase a home at around £180,000 these days while only having 10% of the investment saved up.
Essentially this would only leave less spending money as more had to go towards mortgage payments, which is one of the reasons why the standard of living in especially London is not among the top cities in the world, apart from the rich who do not need to worry about the markets as much.
Additionally our basket of goods does not account for rent or the cost of mortgages. This means that what most people of the working population probably have to pay for is not considered in the cost of living, and as most of us can probably figure out, the two components will take up a large percentage of income.
Personally I believe this is the government turning a blind eye to the property market. Property has been a hot topic in the UK and especially London over at least the past 10 years and yet the government has not decided to include it into the CPI, which should have given us much higher inflation rates and could have been an indicator to the credit crunch. Of course, it would have meant more explanations from the chancellor to what is required to tackle inflation and made interest rate policy even more difficult, but we may not have ended up with such a crisis.
