The Bank of England adds some dynamite to the war of the generations

It has been an interesting week for the Bank of England. On the one hand the main footstool of its monetary policy saw a major reverse last night as the Forward Guidance promises of Janet Yellen and the US Federal Reserve turned to dust yet again. how long before everybody realises that this particular Emperor or Empress has no clothes? Also those who took Governor Mark Carney’s advice to remortgage will not be smiling if the fall in gilt yields – the 5 year has fallen 0.1% to 1.28% – leads to lower mortgage rates rather than the higher ones his Forward Guidance predicted.

Mind you the Quantitative Easing (QE) bond buyers of the Bank of England may be popping the champagne corks as the Gilt market surges and the £8.4 billion they bought earlier this week and last turns quite a profit. Thanks Janet! Oh and let me set a type of brainteaser which is that if you take a Richard Murphy ( architect of Corbynomics) view of QE can you ever have a profit on the Gilts? It gets harder if you think that the sellers of the Gilts do have an opportunity cost loss.

Also if you take my view that the Bank of England does not actually want to raise interest-rates then it will welcome the 3 cent or so rise in the UK Pound £ which has taken place since the middle of this week. A new rate above US $1.56 tightens policy again and reminds me that the period since March 2013 has been the equivalent of a 3.5% rise in Bank Rate.

The Bank Underground

No not the place which was my commuting stop for many years! There is a Bank of England blog with some interesting things to say on debt and its human lifecycle. So before it gets redacted let us sing along with the Jam and take a look.

But I want nothing this society’s got
I’m going underground (going underground)
Well, let the brass bands play and feet start to pound
Going underground (going underground).

The lifecycle of debt in the UK

Firstly we get a confirmation of my theme that house price rises are inflation for first time buyers and indeed any buyer of net housing equity.

They (most young Britons) may tell you about their struggle to get on the ladder, or how they’ve had to make ever larger concessions such as moving to the fringes of town.

Then we get a confession about one of the campaigns in the war of the generations which is that the young face “debt,debt,debt” as they look forwards.

This post empirically underpins what has been anecdotally obvious for some time: that the burden of debt is disproportionately falling on the young, and much more so than any other time in the last 20 years.

Let us take a look at the pattern of debt over time.

What does this tell us?

Let’s start with debt. First, the difference between each cohort and its immediate predecessor is widening. There is hardly any difference between the 1941 and 1931 cohorts, but the differences between the 1951, 1961, and 1971 cohorts are staggering.

Let me ram this home and the emphasis is mine.

It seems that secured debt is rising super-fast for the young.

At this point it feels that the author is trolling Max Keiser does it not? But there is more to the analysis and again the emphasis is mine.

The younger cohorts have much more distinctive inverted-U humps than older cohorts which remain elevated for much longer. It is possible to imagine a world where younger households will reach 65 and still have debt.

So we have them with debt and if I may make a sweeping generalisation the older generation with housing equity wealth gains. This leaves us with the thought that in overall terms the debt of the young is paying for the wealth effects of the older generation.

What about incomes?

The affordability of debt depends to a large extent on incomes so if everybody was earning more then the situation would look different. Regular readers of this blog who follow my analysis of real wage trends will be fearing the worst and this point and wondering if or maybe how the Bank of England will sugar this pill.

Turning to income, the differences across cohorts are much more subdued…….Taking the charts together, one can conclude that income growth has been unable to keep up with the pace of house price inflation.

Also it is willing to point out that this appears to be a relatively recent phenomenon.

In fact, the 1981-1990 cohort are practically earning the same as those born between 1971-1980

This has a consequence.

This spectacular divergence between income and debt for younger groups is worrying.

Will we see intergenerational mortgages in another outbreak of the Turning Japanese influence of these times?

Superficially, the charts suggest that it might become routine for younger cohorts to retire with mortgages—something unprecedented for the UK.

What about the wealth effects?

Central bankers love wealth effects as frankly they are one of the few areas where they can even try to claim success in the credit crunch era. In a way the chart below illustrates that but the real issue is the shape of the curve.

Whilst the young have the debt it is the older generation who have the wealth. If we note that the data was based on 20 years of a survey from 1992 to 2102 and that since 2012 there has been a house price boom we can conclude that it has got worse! Some of the young will have got on the housing ladder in time to gain but existing home owners have got something of a free lunch. Many others will have missed out.

Excellent stuff and i will forgive the lapse into central banker speak where we get a very Orwellian style of “debt is good” below.

Or is that a reflection of a world where the lucky few have incredibly high levels of debt while the unlucky young have no debt at all?

Central bankers do live in one of the alternate universes that physicists speculate about don’t they? Indeed physicists may get some support for their theories view this route.

Comment

I welcome this very much and note that if we widen the debate it seems that the younger generation faces a housing market which is ever more expensive however they try to play it. This is from Your Move today.

On an annual basis rents are now 5.5% higher than in August 2014

Actually that is better than the 6.8% of July but is way ahead of even the new improved wage rises levels that I analysed on Wednesday. So if they try to avoid an apparent lifetime of debt slavery it gets ever more expensive too. If we think of other debt we know that student loan debt is surging too and we wonder if perhaps the young are behind the rise in unsecured debt too. That may be the reason why more recently there has been a turn in the level of mortgage debt for the younger generation which may be for the simple reason that it is out of reach.

In some ways to read this in a Bank of England blog is pure dynamite.

It seems that the widening gap between the haves and the have-nots isn’t just across income or socioeconomic categories—as some have been (correctly) arguing —but also across generations.

It seems that even official bodies may be trolling us  on here now. But much more importantly the younger generation will be singing along with Jay-Z and the musical Annie and maybe for a very long time.

It’s the hard knock life (uh-huh) for us
It’s the hard knock life, for us!!
Steada treated, we get tricked
Steada kisses, we get kicked
It’s the hard knock life!!

Oh and I do hope that the author of the blog May Rostom is not posted to a dark airless room which the Bank of England tea trolley never reaches.

Now how much of this has the Bank of England and its central planners caused?

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29 thoughts on “The Bank of England adds some dynamite to the war of the generations

  1. I was late to the party but took on a 25 year mortgage when I was 27. A few years into that I started accelerating the payments. (Do you remember that the building society would take your money but only credit it to your account at year end thus getting your money for a year with no interest payments to you? So I paid a large payment on last month of year.) Then I would feel comfortable and re-mortgage on a bigger house out to 25 years. Repeat, repeat, repeat. I was still going to be done with mortgages at 60.

    Then my mum died and I paid off both mortgages the next day.

    That is the deal with my kids. If I can’t spend it all before I’m done then my highly over-valued properties will take debt away from them.

    Not every one has a parent in this position but a lot do. Just keep things going and will be well. Persuade the young that if they maintain the system they will benefit eventually. Crafty Coyote is running nicely, well over the cliff edge and has not looked down…yet.

  2. Hello Shaun

    I have to admit I’m really hacked off with this silly idea there’s a war between generations

    Are you falling into the same trap in a effort to get Pestons job ? 😉

    There is no war between the people generations . This housing crisis , and crisis is what it is , is due to the Banks . ( oh god not them again ! ) Well think about it

    I’m not getting any benefit from my house , its home to me , my wife and two grown kids . They cannot move out because they cannot get mortgages big enough to buy a shoe box and I cannot down size because they live with me

    They’ll have to wait until me and the wife die at this rate ( then fight amongst themselves for whats left over from paying health care for us ! )

    The “war” , if any , is with the BANKS. they still need high asset prices to make them solvent and the big buiilding companies are not going to build a shed load of houses at today rates when they can better in a few years time. And no one is making land anymore . And we have a growing population as well .

    So let me pose the question if we could build enough housing to meet the pent up demand , what do you think will happen to housing prices , fall?

    if they did fall , then I’d posit the Banks will collapse , or at least go bankrupt . and the MSM will bleat endlessy on how poor we are because houses are cheaper – and yes a good number of house buyers today will tomorrow see the value of their house fall whilst the new houses are cheaper and may also hand in their keys, like the 1990’s ., remember that ?

    But I tell you what , lets build anyway and use QE to pay for any looses

    We can start with those brownfield sites call golf courses and that biggest buy to let landlord the Duke of Westminster , Right to Buy , right on, mate !

    Forbin

    V for Vendetta

    • I agree we should build, but we should also have the state controlling the money supply. And land value tax.

      What if we did try to build to declare war on the banks? Guess who you’d also have to fight (not that it would take long if we dispensed with one man one vote and went back to fisticuffs):

      • hmm, If you can’t build across ( and this will happen with any finite plot of land , Green belt or not) Then you build up

        the sky’s the limit , in that go too high an oxygen content falls 😉

        we cannot seem to get this organised , did nt Shaun point out we had a schools shortage “surprise” a while back after noting that the increase in births 5 years before was a bit of clue …

        Asf or the picture ( and those who agree with them ) where are their kids and grandchildren suppose to live . let alone all the new British they gladly embrace when seeing certain pictures on TV .

        I bet they didn’t think it through ……. yet alone act

        Forbin

        • Hi Forbin

          Yes I did point out the lack of basic forward planning in schools allocation. Oh and as to Peston’s job no thanks :). There would be far too many compromises for me.

          A deeper question than war of the generations is looking at how life for the young will be different and it seems that we can be sure debt and more debt will be on the list.

          You are right about the banks by the way..

  3. A cynical person might read more into all this; are there any such people here, I wonder? In case there aren’t, here’s some thoughts. Firstly, people in debt are cautious people. They don’t want to risk doing things that might make them fail to make a payment, lose what they have and not be able to borrow any more. They’re cautious in politics too. There’s another word for that…what is it?…oh, yes, “conservative”, that was it – they become conservative. Give people a mortgage and suddenly they are locked into the system in a very real bricks-and-mortar sense. You can scare them with talk of risky political boat-rocking. You can tell them, over and over, that There Ain’t No Alternative to doing things the way you’re doing them because they fear the unknown devil more than you. You can tell them that if they get arrested for protesting against government policy then no one will pay their mortgage and they’ll lose their homes. In other words, you can keep them in line.

    But it only goes so far. As we saw in 2008, if enough people are in enough debt then they *might* all just up and default. If they have nothing left to lose, or have other things to spend money on more important than interest (e.g., food), then they might just walk away. Last time, everyone else bailed out the banks from the result.

    What, actually, does the BoE think they are going to do when all those younger people retire and say “actually, I’m off to rent, bugger your repayment plan”?

    • I’d certainly agree with your premise that debt is being used to control us. I don’t agree people can just walk away. Housing is modern slavery. We have hand over a lifetime of labour for the right to exist.

    • agree with debt being a control mechanism , along with plenty of cheap food and EastCorridale to keep the masses quiet .

      as for who walk off – well 1990’s it was over debted homeowners
      – ouch to the banks

      in 2008 it was bribery by the Too Big To Fail Banks . and thus the stage was set ……

      The people have been made to walk the plank by the pirate banks and you can only shuffle so far out before reaching the end …..

      ( oops, there goes another peon , and the pirates are on the ship watching you fall off and looking back at the other captives and asking ” who’d like to go next ?”

      Forbin

    • Hi TW

      From time to time we debate that we face a world described in the novel Dune. If so this seems a future of debt suffrage or rather Harkkonen to me.

      I am not sure if I have welcomed you before so if I haven’t welcome…

  4. Hi Shaun,

    What an insightful post today. It’s interesting to see what many of us have thought for so long confirmed in this way. If mortgage rates do increase appreciably the injustice of the situation will be amplified. Lenders currently seem reluctant to have a repayment term beyond the age of 65 so how many will have secured debt beyond that age? You mention intergenerational mortgages, but I can see a time when 70 or 75 becomes the default retirement age and at that point 35 years becomes the standard repayment term with a resulting surge in house prices.

    • Hi Zummerzetman and thank you

      I do agree that the issue of potential intergenerational mortgages does clash with the MMR policy of the Bank of England which tightened up lending rules. The Financial Policy Committee has been very accident prone with several own-goals. The Money part of the Guardian put it thus in March.

      “The majority of lenders will only grant a mortgage to your planned retirement date. So if you are aged 45 and expect to retire at 67, the maximum mortgage term might be just 22 years.”

      Something will have to give….

  5. Won’t make any difference. The old know the young are getting stuffed and in the main they don’t care.

    I’m in between you and Forbin. Let’s be clear – the banks are the root cause. The establishment and the banks are creaming it off by making us all work for longer, including changes to how they calculate the amount lent being “household income” not “primary income” meaning both parents now have to work.

    However let’s also be clear that the boomers+ are selling their own kids down the river for what amounts to:

    1. unrealisable housing benefits (most have one home, can’t sell without buying another)
    2. small beer such as the triple-lock which goes up *above* inflation

    They are selling their vote for these on the condition that they don’t mind their own kids being sold into debt slavery.

    Now the UK establishment have a lot of failing, but even they must look down on our worthless boomer+ proles in disgust. How do the establishment stay in power so many hundreds of years? Rule 1: don’t shaft your own.

    Truly the UK disgusts me. Here’s another article on housing btw, Economist:

    http://www.economist.com/blogs/freeexchange/2015/09/housing-britain

    This image shows the real picture best:

    Also that bank underground article acts as though this is all news. It’s been known for nearly 15 years now.

    • Hi Benfitzg

      I used to work with someone who had a bowl theory of charts for ones like you have posted. He would expect a drop to below 100….

      It would be even more revealing and exposed if it was compared to real wages.

      I take your point about the Bank of England. I think that the fact that even in such a way it says this means that it is worried and that this was backed up by Andy Haldanes negative interest-rates and ban currency speech of yesterday.

    • The penultimate sentence says it all. Houses may be “expensive” but money is so cheap the so called generational war doesn’t exist as the monthly payments are similar/cheaper than when I bought mine in the late 80’s or as the article says “…interest payments as a percentage of income are reasonably low.” Of course this puts downwards pressure on any thought of increasing rates as a small increase can have big nasty effects when people have borrowed 5 times earnings. Something they should have thought of when slashing rates in ’08 without implementing any accompanying macro measures like MMR.

  6. One further hand grenade if I may.
    Many people are keeping their heads above water by remortgaging to qualify for banks’ fixed rate terms.
    With svrs in some cases close to 5% (Santander’s is 4.74%), interest payments could almost treble if you have to move onto them.
    Bearing in mind how little capital is repaid at the outset of a mortgage, and how much is charged in fees and costs, it seems probable that many out there are surviving by renewing 100% of their original borrowings every time the fixed rate period comes to an end.
    It strikes me that this is likely to come to a head at some point, as. all other things being equal, people will reach the age where the term has to reduce too.

    • I seem to recall that just a few weeks ago it was suggested that
      930000 interest only mortgages related to people approaching
      retirement age. Could we all be standing on a landmine?

      • According to the Financial Conduct Authority, by 2020, 6m interest only mortgages will be due for repayment. It is thought that 10 per cent of these have no repayment strategy.
        DailyMail 2013

        if it happens that’s 600,000 in 5 years time……..

        Forbin

        ” this is going to be quite the ride ! ” Tron Legacy

        • Would you care to cast your mind back 20 years to what was viewed as sufficient payments into a vehicle, and guess how many others will fall seriously short?

    • Good point therrawbuzzin. Another factor which is significant is that it seems that people change jobs much more frequently these days as the workforce is more ‘flexible’. This brings with it the problem that lenders won’t give you a new mortgage if you have only been with your current employer for 6 months for example. I found this to my surprise recently when renewing my mortgage and my earnings were not eligible to be taken into account because of my relatively short length of service. All of a sudden you are shut out of the best deals and stuck on SVR just because you’ve changed jobs.

  7. HI Shaun
    Thankyou for another interesting piece.

    Well surprise,surprise, with apologies to the late Cilla, one
    Mr Haldane has finally admitted that the next rate change
    could be lower. So you were right all along, if this news
    filters through the media you could rise to no. 22 or even
    higher!

    So if negative rates become the norm how will TPTB be
    able to surpress gold? It’s my guess that it will be a very
    slow bicycle race to reality .

    I’m not keen on popcorn so I’ll stockpile cashews just in case
    as I’m a boomer I can afford them!

    JRH

    • Hi JRH and thanks

      Actually as so many in the media have over committed themselves in the opposite direction I may be demoted out of the top 100 for being right.

      It might be quite some time before I am invited onto BBC Newsnight for example.


      Me: I hope they are tasty!

      Duncan Weldon
      ‏@DuncanWeldon
      If the Bank of England’s next move is a cut rather than a hike, I will eat my shoes. And put it on YouTube”

      As I have been arguing for nearly two years a Bank Rate cut is as likely as a rise.

      • Duncan Weldon
        ‏@DuncanWeldon
        If the Bank of England’s next move is a cut rather than a hike, I will eat my shoes. And put it on YouTube”
        ____________________________________
        It’s the first time I’ve felt a pang of nostalgic longing for the dogshit which used to be scattered around our pavements.

  8. Shaun,
    The problem is even worse when you consider the demise of company pension schemes and the funding gap in those closed schemes – limiting pay rises to current employees especially those newbies who can’t join such pension schemes!
    My mortgages started as endowment backed but financial institutions fees etc and poor returns killed that golden goose. Even the replacement ISA backed schemes etc now have paltry returns.
    Meanwhile pension reform presents the best opportunity for fees etc for those with some pension pot left!

  9. Shaun, the chart you use representing debt for different demographic groups is hopelessly out of date if you wish to demonstrate the “young” are increasingly indebted.

    Those people who were 21 in 1981 (the latest cohort) would be the last part of the baby boomers born in the early 60’s whom everyone criticises as “living off the young” yet it would seem to be them and those boomers born in the early 50’s whom appear to be experiencing debt problems according to the chart. These people cannot be considered “young” now as the youngest would be approximately 50 at time of compilation (2011), so your argument about “war of generations” remains unproven.

    Do you have any further charts demonstrating indebtedness at the various ages from 1991 and 2001 as it is these age groups (now aged 30 – mid 40’s) and younger ones who will be experiencing problems if your assertion is correct?

    “Some of the young will have got on the housing ladder in time to gain but existing home owners have got something of a free lunch.” – I’m not sure they have as the curve moves outwards until 2005 demonstrating increasing wealth/inflation but then shrinks to theeffect that by 2011/12 “wealth” has shrunk by 25% – 40% along the age axis. If these were house prices we would be talking about people who bought in 2005 being in negative equity in 2011.

    The chart shows that which has always been the case – the young don’t have much, obviously because they are only just starting work lives and the old have a lot more than the young because they have been working longer.

    The new development is the old are hanging on to their wealth longer but the worrying development is that ALL AGE GROUPS are losing wealth.

    So, once more I am in disagreement with your analysis.

    Maybe I’m not thinking straight (it’s 1:20 am and I’m tired) but if not please show me what I’m missing.

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