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A whistle-stop tour of your finances in 2012
Lorna Bourke looks back on a tough year for UK savers and investors.
Looking back on 2012, the best that can be said is – it could have been worse. At the beginning of 2012 we were worrying about an imminent euro crisis precipitating another banking collapse, not to mention the perennial concern about rising food and energy costs. Job security was a worry and would unemployment hit 3 million? Where were house prices heading and was there any point in investing if the economy was going back into a double dip recession?
We are still anxious about a euro crisis – nothing has been permanently resolved. But the general consensus is that so long as Angela Merkel remains in power in Germany – and she doesn’t go to the polls until September 2013 – Europe will somehow muddle through, even if it means austerity drags on with no end in sight.
Merkel doesn’t want to go down in history as the politician who broke up the euro – even if floating off the Club Med countries and allowing the euro to devalue is clearly the fastest way to recovery for the southern states. Merkel enjoys a 57% approval rating in Germany and is regularly voted the most popular politician, so she looks like winning a third four-year term. With 10 months to go until the election, anything could happen. But it’s probably safe to say that while she remains in power, the eurozone won’t break up.
House price angst
House prices are a bellwether of how rich we feel – and we are not feeling very well off at all. Nobody was expecting house prices to rise in 2012 and the general consensus back in January was a fall of up to 5%. Economist Howard Archer of IHS Global Insight and Ray Boulger of mortgage broker John Charcol were predicting falls of 5% and 4% respectively this time last year.
But Halifax economist Martin Ellis – who has been in the housing business for decades – predicted that 2012 would be another dull year. He was more or less spot on.
The reality has been a 1.2% drop in house prices over the past 12 months according to Nationwide and 1.7% according to the Halifax. Nationwide calculates that the average house price has fallen from £165,798 in November 2011 to £163,853 in November 2012 – well below the all-time high of £186,044 in October 2007. No wonder homeowners are anxious.
Housing affordability: slightly better
Housing affordability has improved – at least on paper. The Halifax price/earnings ratio dipped from 4.42 in October 2011 to 4.22 in October 2012. However the ability to get a mortgage is still heavily dependent on the risk lenders are prepared to take and there is no sign of any let up in tough lending criteria. Only those with clean credit track records and sufficient income are able to access loans. The good news is that figures from the Council of Mortgage Lenders show an improvement in mortgage arrears with loans more than three months in arrears down to 218,400 for 2012 compared with 225,600 for the same period 2011. This is just under 2% of the 11.31 million loans in existence.
For the hundreds of thousands of young people who would like to buy, saving a 10% deposit of around £17,000 plus costs, say a total of £20,000, remains a formidable obstacle. And monthly repayments are an issue too. Interest-only loans have all but disappeared for new borrowers, so this route to keeping monthly outgoings to a minimum no longer exists.
But costs have improved – at least in the headline rates if not the fees. A year ago the best five year fix for a 90% loan was 5.99% from Leeds Building Society. Today the best first-time buyer 90% mortgage is a discounted 3.84% for two years from HSBC while the best fixed rate 90% loan is 3.94% fixed for three years from Yorkshire Building Society. HSBC and NatWest are both offering 90% five year fixes at 4.69% and 4.79% respectively.
There is still a large differential between the best rates available to those with a 40% or more deposit and those who can only round up only 10%. HSBC’s market-leading lifetime tracker is now an even better deal falling from 2.69% - (BBR plus 2.19%) to 2.54% (BBR plus 2.04%) and the deposit has dropped from 40% to 35%. The difficulty is not the cost but qualifying in the face of stringent affordability criteria
Inflation pressures remain
Inflation has come down from a high of 5.2% in September 2011 to 2.7% but doesn’t look like falling any further – not least of all because energy and travel costs are set to rise at above inflation rates in early 2013 and food and petrol prices continue on up.
Spencer Dale, chief economist at the Bank of England, is not hopeful on this front saying that inflation is unlikely to fall back to its target of 2% for some time. The Bank’s latest forecasts suggest CPI will be above the 2% target until mid-2014. Much will depend on the policies adopted by the new Bank of England governor designate, Mark Carney. But there are many who believe that inflating away the debt problem will be the government’s most likely course. Carney is already talking about abandoning inflation targeting in favour of, ‘nominal GDP targets.’
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