As we look at the UK credit situation there are building pressures almost everywhere we look. This is hardly a surprise if we step back and review the years and years of easy monetary policy involving cutting the Bank Rate to a mere 0.25% and some £445 billion of QE ( Quantitative Easing) as well as other policies. If we stay with QE then the UK is second on the list in terms of how much of its bond ( Gilt) market has been bought by its central bank at 37% according to Business Insider. I doubt Governor Carney will be emphasising this too much when he presents the Financial Stability Report today.
Central bankers are capable of the most extraordinary blindness when it comes to themselves however as I noted when I received this in my email inbox.
Why are house prices in the UK so high? Can prices and mortgage debt continue to rise? How is government policy affecting outcomes? David Miles will explore these issues and consider how the property landscape in the UK might play out over the longer term.
This is the same David Miles who in his time at the Bank of England did as much as he could to drive house prices higher with his votes for Bank Rate cuts, more QE and the bank subsidy called the Term Funding Scheme. He even voted for more QE in the summer of 2013 as the UK economy picked up! Of course in his last month in the autumn of 2015 he claimed he was on the edge of voting for a Bank Rate rise but this only fooled the most credulous. The reality is that he was a major driver in creating this sort of situation. From April.
Yorkshire Building Society is launching a mortgage with the lowest interest rate ever available in the UK at 0.89%.
The new 0.89% product is a two-year variable mortgage with a discount of 3.85% from the Society’s Standard Variable Rate (SVR), which is currently 4.74%, and is available for anyone borrowing up to 65% of the value of their property.
This is another problem area that we have looked at several times due to two main factors. Firstly we have seen quite a rate of growth and secondly the market has changed massively. These days nearly all new cars are bought on credit as this from the Finance and Leasing Association makes clear.
In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.
The deals look initially very attractive.
There are often 0% deals available, so it’s worth shopping around.
However there is a “rub” as Shakespeare would put it and we see the danger here as the Financial Times takes up the story..
Most borrowing is in the form of Personal Contract Purchases. Customers pay a deposit and monthly payments for a fixed period. At the end of the contract, they can buy the car from the manufacturer for a price guaranteed at the start.
The in-house banks of car companies, which provide most of the finance for PCPs, generally set this guaranteed price at about 85 per cent of what they think the used car will be worth.
We know that in the United States used car values have dropped sharply so let us look at the UK as the FT explains.
“However, the detail is the key,” said Rupert Pontin, director of valuations at Glass’s. Newer used-cars are losing more of their value and more quickly. A used car that is less than two-and-a-half years old is worth 57.6 per cent of its original value, down from 61.1 per cent in 2014.
“This is likely to continue to be the case for the rest of 2017 and into 2018 as well,” he said, as more cars come off the three-year credit deals they were bought with and that have been wildly popular with UK consumers.
So they are “Fallin'” as Alicia Keys would say. This poses quite a problem for a system which depends on the resale value of the cars. Initially this will probably hit the manufacturers who offer these schemes as those leasing will presumably hand more of the cars back. For deals going forwards though the resale value will be adjusted lower and be factored into the deal making the buyer/consumer get worse terms.
This has changed the car market
I have written in the past about a friend who bought a car and took a contract deal because believe it or not it was £500 cheaper than buying it outright. More is added on this front in a reply to the FT from leftie.
There’s no truth in the description ‘interest free’. The cost of the loan is built into the ticket price. We know that because the seller may not offer a discount on the sale price for fear of the ‘interest free’ bluff being found out. It’s institutionalised dishonesty that traps the unwary and leads to excessive debts.
Whilst some do game the system most are unwary pawns.
I found it was cheaper to buy my small new Ford on PCP credit than pay cash, and the dealer admitted he would get more commission from the former.
Don’t worry, he told me: wait a couple of days for the systems to update then ring Ford and pay off the loan. I did, and accrued interest was negligible. Few people do this – it’s so tempting to hang on to your cash. ( johnwrigglesworth )
So the Merry Go Round rumbles on with the can as ever being kicked about 3/4 years each time. What could go wrong? From the FT.
Many car loans are securitised — packaged together and sold on to investors as bonds — as mortgages were in the run-up to the financial crisis. This has led some to worry that a slowdown in car sales could cause financial instability.
I have noticed something rather troubling this morning and let me make it clear that this is from the US and not the UK but of course such things tend to hop the Atlantic like it is a puddle and not an ocean.
This faces ch-ch-changes as explained by the Agents of the Bank of England last week.
Contacts reported a range of potential headwinds, including
the slowdown in real pay growth, upward pressure on new car prices arising from sterling’s depreciation and, for high-volume manufacturers, weaker second-hand car residual values, which had raised the costs of depreciation and so car finance.
If we start with the UK car market it has seen an extraordinary amount of stimulus. First came its own form of QE as redress payments from the Payments Protection Insurance scandal came into play and next came the easing of the Bank of England. No wonder sales have risen and not all of the drive came from the UK as some came from policies elsewhere as the FT explains.
Thrifty German savers in search of better interest rates have helped fund the debt-fuelled car-buying boom in the UK…..The biggest deposit taker is Volkswagen which had €28bn of consumer deposits in 2015, followed by BMW with €15.9bn. RCI Banque, the bank of Renault, had €13.6bn of deposits.
Meanwhile for Bank of England Governor Mark Carney it is clear that a week is apparently a long time in central banking. Last week we saw boasting.
This stimulus is working. Credit is widely available, the cost of borrowing is near record lows,
This week the Financial Stability Report tells a very different story.
Consumer credit has increased rapidly
Something to cheer like the Governor did? Er no.
Bringing forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress
So perhaps not as we see a rise in the capital required by UK banks.
Increasing the UK countercyclical capital buffer rate to 0.5%, from 0%. Absent a material change in the
outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC
expects to increase the rate to 1% at its November meeting.
That will be two steps of £5.7 billion if the initial estimates are accurate as we note they have finally spotted something we started looking at last summer.
Consumer credit grew by 10.3% in the twelve months to
Me in City AM