The Fool.co.uk guide to (almost) everything you need to know about

Transcription

Your Finances In 2012
The Fool.co.uk guide
to (almost) everything
you need to know
about loans
Table of contents
Prediction 1:
The average house will be worth £13,000 less in
2012 than today
Prediction 2:
Seven out of ten credit applications will be rejected
Prediction 3:
House Price to Earnings ratio will improve for the
first time since 1995
Prediction 4:
Pensioners will be worse off in 2012 than in 1980
Prediction 5:
Households face an £8,000 shortfall in their family
budget in 2012
Welcome
2012 is constantly being touted as a time of opportunity. If we
believe what we hear then the UK will be a prosperous country,
thanks to the influx of investment on the back of the Olympic
Games.
Is this the case though? Or is the Government banking on this to
get out of trouble?
We’ve taken a look at five of the biggest trends in the economy
to look at what the future holds for us Brits.
This report, written by Dr. David Kuo, Head of Personal Finance
at Fool.co.uk, identifies what we believe are the threats and
opportunities consumers face over the next five years, and
what they can do to reduce those threats and capitalise on the
opportunities.
The Big Idea: www.fool.co.uk/big-ideas/your-finances-in-2012
2
Prediction 1: The average house will be worth £13,000 less in 2012 than today
We’ve already started to see a drop in house prices in the news over the past few months. By looking at the long-term trends,
we can conclude that this is just the beginning of an overdue correction.
Since 1952 house prices have grown at between 8%
and 9% a year 1 2, but noticeably accelerated after
the turn of the Millennium. In 1999, the average cost
of a home in the UK was £71,121. But by 2000, it had
jumped 13% to £80,365. And in 2006, the average home
in the UK cost £166,469 – more than double the cost six
years earlier.
View from Fool.co.uk
Currently, the average price of a home in the UK is
£198,898. Fool.co.uk believes that reversion to mean is
likely, which could see house-price growth revert to the
long-term trend of between 8% and 9%.
3
Linear regression analysis of house-price data suggests that house prices may fall in 2008 before resuming growth at 8% per
annum. We believe that the average price of a house could fall by up to a fifth to £157,290 in 2008 before rising to £185,410 in
2012. This would be £13,000 less the price of a typical home now.
View from Halifax
“The rise in interest rates since August last year and
negative real earnings growth so far this year are curbing
housing demand, leading to a slowdown in both price
growth and activity.
“The UK economy is in a strong position. Sound market
fundamentals, including high levels of employment and a
shortage in the number of properties available for sale, will
continue to support house prices.” 3
View from Nationwide
“A slowing economy, poor first-time buyer affordability and a slowing buy-to-let market are all factors that point to weaker demand.
On the supply side, however, prices will still find an important support.” 4
4
View from RICS
“The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most UK
regions. A decline in transactions may be in the offing as stalemate returns to the market.” 5
View from Fool.co.uk members 6
One in two people (50%) who plan to buy a home in
the next five years say their plans are not affected by
predictions of large price drops. Meanwhile, eight out
of ten people (75%) who hope to sell their homes in
the next five years are not changing those plans on the
strength of the long-awaited crash prediction.
Outlook for homeowners
House-price inflation has been a boon for homeowners,
but a bane for people trying to get onto the housing
ladder. Consequently, the dip in house prices this year
may provide an opportunity for first-time buyers to climb onto the housing ladder more affordably.
However, correctly timing the purchase of a home is not easy. Instead, mortgage borrowers should ensure that they can
5
comfortably maintain the repayments on their home loans, which can deliver long-term rewards. 7
People who bought their homes in 2007, at what may appear to be the top of the property market, should not be concerned.
Our calculations show that they should still be better off in five years time compared to someone who rented a similar property
over the same period.
Someone who bought a typical home, valued at £198,898, on a 25-year repayment mortgage at 6% will have repaid £76,890
over five years. By contrast, a tenant will have paid out £49,724 in rental costs over the same period based on a 5% rental yield
on a similar property. They will have paid £27,166 less than someone who bought their own home, but unless they invested the
difference, they will have nothing to show for it.
People who bought their homes in 2007, at what may appear to be the top of the property market, should not be concerned.
Our calculations show that they should still be better off in five years time compared to someone who rented a similar property
over the same period.
Someone who bought a typical home, valued at £198,898, on a 25-year repayment mortgage at 6% will have repaid £76,890
over five years. By contrast, a tenant will have paid out £49,724 in rental costs over the same period based on a 5% rental yield
on a similar property. They will have paid £27,166 less than someone who bought their own home, but unless they invested the
difference, they will have nothing to show for it.
6
Prediction 2: Seven out of ten credit applications will be rejected
We are all too well aware of the losses banks have incurred in the past six months in response to the credit crunch. This was
primarily caused by irresponsible lending in the US housing market. Today, lenders are clawing back those losses through extra
charges. 8 They are also becoming more cautious by only accepting the best applicants.
Currently, one in two people has had credit card and loan applications rejected. By 2012 the rejection rate could be as high as
70%. This will make it very difficult for someone without an immaculate credit history to get hold of reasonably-priced credit.
But we Brits have become accustomed to buying what
we want now on our credit cards, and worrying about
paying for it later. However, we will need to change as
access to credit gets harder.
Personal debt has been increasing at around £10 billion a
month since 2004, 9 and has now reached £1,391 billion.
This is made up of two components, of which the larger
is lending secured against the home. Secured lending has
risen from £867 billion in November 2004 to £1,169 billion
in November 2007 – an increase of more than £8 billion a
month.
7
The second component is consumer credit, which includes credit cards, unsecured loans, and motor and retail finance deals. It
has risen from £183 billion in November 2004 to £222 billion at the end of October 2007.
Both secured and unsecured lending have been on the rise since 2004, with the former growing twice as quickly. Secured
lending has grown around 12% a year, and unsecured lending has risen 6% per annum.
Over the next five years, secured lending will increase by more than the average 11%, as consumers in trouble have to resort to
using their assets to clear debt. This will result in secured debt reaching the £2,000 billion mark!
Meanwhile, growth in unsecured lending will slump from 6% to 4%, as a result of credit being more difficult and expensive to
obtain.
View from Citizens Advice
“Time and time again we come across people in desperate straits who need not be there if the firm who lent them money had
acted responsibly on day one. And while some regulators have taken action on scandals like the mis-selling of payment protection
insurance (PPI), others seem to be asleep on the job.” 10
8
View from PricewaterhouseCoopers
“There are tough times ahead for consumers. Banks are continuing to take action in response to the rise in consumer debt by
tightening their credit acceptance policies. Many consumers will find it increasingly difficult to obtain credit in the run-up to
Christmas.” 11
View from Fool.co.uk members
Only one out of 12 (8%) Fool.co.uk members is
sympathetic towards those who rack up debts as a result
of unforeseen circumstances. However, over half (56%)
believe that it is time for people to act responsibly, with
another one in five (21%) hoping that the credit crunch
will change consumers’ relaxed attitude towards debt.
9
Outlook for debtors
With the credit crunch beginning to bite, and growth in the economy showing signs of stuttering, borrowers need to be aware
of a more cautious stance adopted by lenders.
If you have both savings and debt, it may be a better idea to forgo the luxury of a rainy-day fund and pay off outstanding debts
instead. A recent Fool.co.uk study showed that credit-card holders are squandering £3 billion by stashing away money for
emergencies and carrying credit-card debt at the same time. 12
10
Prediction 3: House Price to Earnings ratio will improve for the first time since 1995
In 2006, average earnings for full-time employees in Britain grew in line with inflation to reach £457 a week. 13 This equates to an
average annual income of £23,764. Full-time male workers fared better than their female counterparts. The average income for
men was £498 per week, or £25,896 a year. Women earned £394 a week, or £20,488 a year.
The combined income of a typical household is £46,384 a year, but workers should not expect above-inflation pay rises. The
average wage inflation rate over the last 70 years has been 8%, with the last twenty years’ rate falling to around 5%. In the last
decade, wage growth has slowed to just 3%. Furthermore,
the Government has stressed that pay rises in the public
sector should stay within the Government’s inflation
target of 2%.
In the main, wage growth has tended to mirror inflation,
and this is likely to continue. Consequently, with inflationlinked pay increases, male workers can expect to earn
£30,905 a year, while women could take home £24,463
a year in 2012. Typical household income could rise to
£55,368.
11
By and large, whilst prices and wages have gone up,
income has not always matched the rise in price of
big-ticket items. In particular, house prices, which were
around four times average income in the 1960s, now
approach eight times average income
Currently, the average home is valued at over seven times
the income of the average British worker. The good news
is if you’re looking to buy a house in 2012, they should be
slightly more affordable then. The bad news is that house
prices will grow 8% to 9% again every year from 2012,
whilst earnings lag behind at 3% growth.
View from public service trade union Unison
“Pay is a crucial factor in maintaining morale. Putting an artificial limit on pay across the public sector restricts genuine attempts to
reward staff for successful reform and will store up industrial problems for the future.” 14
View from the Chartered Institute of Personnel and Development
“Despite the rise in earnings growth including bonuses, the balance of supply and demand in the jobs market remains conducive
12
to modest pay rises. The UK jobs market does not at present pose a serious risk to inflation. By the middle of next year workers and
jobseekers will be feeling the effects of the economic slowdown as jobs become harder to find and real incomes are squeezed still
further.” 15
Fool.co.uk members are pessimistic over wage growth. Almost half of respondents (46%) reckon that their wage packet will
be at most 5% higher in five years’ time. Youngsters are some of the most optimistic about getting higher wages in 2012, but
people between 34 and 49 years of age reckon that their income will only grow modestly.
Outlook for workers
There is considerable anecdotal evidence that a number of factors have capped wage growth in the UK. These include a shift to
service-sector employment, lower economic growth and increased immigration.
In the short term, consumers can improve their personal finances by negotiating savings on big-ticket items. For instance,
homeowners can save money by ensuring that they get the best possible mortgage. The difference between a lender’s fixedrate mortgage and the Standard Variable Rate can be as much as 2%. On a typical £200,000 mortgage, that can mean as much
as £250 a month.
Over the long term consumers should look at investments to supplement income. Historically, cash investments have, at best,
13
only matched inflation. However, investments in shares have outperformed cash. According to Barclays, shares have beaten
cash 80% of the time over five-year periods since 1945. They have beaten cash 100% of the time over thirty-year periods. 16
14
Prediction 4: Pensioners will be worse off in 2012 than in 1980
The State Pension has risen from around £23 a week in 1979 to around £87 today. Currently a single person can expect to
receive the full basic State Pension of £87.30 a week at retirement, and a couple will receive £139.60 a week from the state. 17
Meanwhile, the current average size of a private pension
pot is £24,335, 18 though two-thirds of annuity purchases
are for less than £20,000. Based on these figures, a man
aged 65 who does not smoke can expect to retire on
an annual income of £1,608. Combined with the State
Pension, a pensioner can expect an annual income of
£6,147.
Based on our estimates for inflation and earnings, the
full State Pension for a single person could rise to £106
a week in 2012. But this is still not as generous as in
the 1980s because, for many years afterwards, the link
between the State Pension and average earnings was
broken. In future the link will be restored, but there is a lot of catching up to do.
15
Between 1980 and 2007, the weekly State pension has
varied from a quarter and a fifth of average income.
Currently, it nestles at around 20% of annual income and
is expected to remain so as pensions rise in line with
average earnings.
The deterioration in the buying power of the State
Pension was highlighted in Fool.co.uk’s biannual inflation
reviews last year. In January 2007, 19 and again in July
2007, 20 people between 50 and 58 years of age said
their personal inflation was around 7%, while the official
inflation rate to which the State Pension is linked was
around 2%.
The point is exemplified by comparing the buying power of the State Pension and the price of a pint of beer. In 1990, a
pensioner could afford to buy six-and-a-half pints of beer a day, but in 2012 the pension will only buy four-and-a-half pints. 21
By 2012, the size of the average private pension pot could grow to £34,131, provided that the bulk of the funds currently in the
pension pots are invested in shares. This means the average person retiring in 2012 can expect an annuity of £200 a month or
16
£2,400 a year. Together with the State Pension, a man
aged 65 who does not smoke can expect to retire on an
annual income of £7,912 compared to £6,147 today.
View from Scottish Widows
“The current generation of over 55s is definitely divided
into ‘haves’ and ‘have-nots’. The ‘haves’ generally have
good employer pensions, often based on their final salary,
and can retire at or before state pension age with good
incomes. The ‘have-nots’ are discovering that they will
have to work for longer than they might have expected
just to make ends meet.” 22
View from Prudential
“People retiring next year are in general entitled to think ‘What pensions crisis?’ On average they are giving up work early and can
look forward to final salary schemes having worked hard throughout their lives. However every silver lining has a cloud and with
pensions it is never hard to find another side. Those of us coming after the Class of 2008 will perhaps not be so lucky unless we take
action to plan for retirement.” 23
17
One in two people (56%) is concerned that their pension
pot may be insufficient to retire on. 24 People aged
between 34 and 57 are some of the most anxious about
the size of their retirement fund, and two-thirds (66%) of
this age group reckon that they won’t have enough to
retire on when they hang up their boots.
Consequently many people believe that their pension
pots may have to be shored up by unlocking the value in
their homes. One out of two homeowners (50%) says they
plan to downsize for retirement to a cheaper property.
Two out of seven people (29%) intend to release equity
from their homes to supplement insufficient savings.
Outlook for pensioners
Not having enough money in old age is probably the single worst fear for Brits. And this fear appears justified given that many
people who retire on a combination of the State Pension and some savings in 2012 will have an income of less than £8,000 a
year.
18
Fool.co.uk has found that most of us plan to stop work by the time we reach our 59th birthday, and by then we plan to have
a pension of £650,000. 25 Twenty-year-olds need to be putting away at least £200 a month now to accumulate the desired
pension pot, and thirty-year-olds who have not planned for their retirement should be saving more than twice as much - some
£470 a month.
Forty-year-olds would need to squirrel away £1,200 a month, and this may require a complete overhaul of their current lifestyle.
It’s a daunting, though not impossible, task. But it may require someone who is living lavishly today to seriously consider a
downgraded lifestyle until they retire.
19
Prediction 5: Households face an £8,000 shortfall in their family budget in 2012
It seems that we have all but given up on saving for the future. The amount of money that we put away has collapsed to a level
not seen in almost 20 years. Historically, the savings ratio, which is a measure of our take-home pay that we save, has been
around 8%. In other words, we used to put away £8 out of every £100 that we earned.
However, the savings ratio now stands at around 2%. Or to put it another way, we are only saving £1 out of every £50 that we
earn. 26
There are a number of reasons why we are saving so
little. Firstly, the rising tax burden on individuals has put a
squeeze on household budgets. According to the Adam
Smith Institute, the average individual theoretically has
to work from 1 January to 1 June just to pay the year’s tax
bill. In the 1960s, a similar individual would only need to
work until mid-April.
Another reason for consumers saving less is that wages
are not rising proportionally with personal inflation.
According to Fool.co.uk’s Inflation Index, personal inflation
is around 7%, but wages are only increasing at 3%.
20
Consequently, consumers have less money to put away after paying household expenses.
Fool.co.uk estimates that personal inflation will dwarf wage inflation over the next five years. As wages rise at around the
Government’s inflation target of between 2% and 3%, personal inflation is likely to hover around 7% a year. This is likely to put
additional strains on household budgets, with their current 2% safety nets vanishing quickly.
Historically, consumers have reined in spending when
economic growth has slowed. And unless we do so again,
this flimsy safety net could vanish in 2008, and consumers
could potentially face a household-budget shortfall of
3% the following year. Initially, the shortfall may be met
through existing savings or short-term loans. However,
the shortfall will become unbridgeable as the gap
between income and expenditure widens further.
In 2010, the deficit between income and expenditure
could widen to 7% and reach as much as 15% of
household income by 2012. The outlook for the consumer
21
is bleak if current trends persist. The typical family with a combined household income of £55,368 could face an annual budget
deficit of £8,305. And with fewer and fewer families conforming to the typical two-parent earning model, this could become
even more concerning.
View from Halifax
“The saving ratio remains very low by historic standards although it is above its 1999 trough. Customers clearly save less in the good
times and put more away for a rainy day when the economic outlook is less promising.” 27
Outlook for consumers
Consumers face a depressing future unless they make drastic changes to their lifestyles today. The increase in housing costs,
utility bills, and food and travel costs mean that there is little room left for discretionary spending.
Homeowners may be tempted to bridge the deficit by withdrawing equity from their homes, but this should be resisted at all
costs. Mortgage equity withdrawal is often touted as an easy way of unlocking money from your home to support extravagant
lifestyles. But it is nothing more than a sophisticated debt that allows banks to help themselves to your home, brick by brick.
22
1
Halifax: National Index October 2007 (8 November 2007)
2
Nationwide house price forecast 2008 (16 November 2007)
3
Halifax: National Index October 2007 (8 November 2007)
4
Nationwide house price forecast 2008 (16 November 2007)
5
RICS: Housing market slowdown continues (13 November 2007)
6
Fool.co.uk survey of 1,291 research-panel members: What do the next five years hold? (14 December 2007) Typical homeowners who took out a
25-year, 100% mortgage on a £198,898 loan at 6% face monthly repayments of £1,282. Over five years, the total outlay will be £76,890. They will have
repaid £20,025 of the original loan, leaving £178,873 outstanding.
Year
2008
2009
2010
2011
2012
7
Predicted price of
a typical home
£157,290
£164,210
£171,172
£178,210
£185,410
Amount of loan
outstanding
£193,357
£191,598
£187,608
£183,371
£178,873
Equity in home
-£36,067
-£27,388
-£16,436
-£5,161
+£6,537
% of equity in
home
-19%
-17%
-9%
-3%
+4%
A typical home is expected to cost £185,410 in 2012, which means the homeowner will have £6,537 or 4% equity in the property.
23
8
Banking Business Review: Barclaycard – More customers being refused credit (26 September 2007)
9
Credit Action Monthly Statistics
10
Citizens Advice: Regulators and business must do more to stop soaring debt (November 2007)
11
PricewaterhouseCoopers: Precious Plastic 2008 – Consumer credit in 2008
12
Fool.co.uk: Credit-card holders squander £3 billion a year on unnecessary interest payments (28
November 2007)
13
ONS: 2007 Annual survey of hours and earnings (7 November 2007)
14
Unison: response to Comprehensive Spending Review (October 2007)
15
Chartered Institute of Personnel and Development: Comments on the Bank of England Quarterly Inflation Report (November 2007)
16
Barclays Equity Gilt study 2007
17
Department for Work and Pensions
18
Birmingham Midshires: Pensioners have £33,000 in savings pot (5 December 2007).
19
Fool.co.uk: Consumers reveal the truth about inflation (12 January 2007)
20
Fool.co.uk: The Government is still underestimating inflation (3 January 2007)
24
21
Campaign for Real Ale: Prices Survey (2007)
22
Scottish Widows: Money too tight to pension (17 September 2007)
23
Prudential: Pension Crisis? What Pension Crisis? (21 November 2007)
24
Fool.co.uk: Seven million homeowners say their property is their pension pot (2 August 2007)
25
Fool.co.uk: 3 million people are slaving today for a better tomorrow (16 July 2007)
26
ONS: Household sector: Use of disposable income (2007)
27
Halifax: Savings ratios over the decades
25
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The Fool.co.uk guide to (almost) everything you need to know about

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