Scary little investment survey

[Canardly]

The built environment usually provides a good indicator of how the economic sails are set. Building and construction is normally the first activity to go into recession reflecting investment levels and the first to come out of it when confidence returns. A recent survey of 1100 or so UK architects indicates that 60% of them have projects that have been cancelled or stalled due to the uncertainties arising from Brexit.

[Moleman76]

I met an economic forecaster once who tracked the health of the local economy by how many portaloos (aka porta-potties over here) were stored at the local purveyor.  Fewer in storage = more in use on construction sites, was his viewpoint.

[Jaded]

Someone tells me that their understanding is that there isn't a shortage of projects, but there are two factors at work here.

Firstly that the investment houses are playing safe, and therefore are reluctant to invest, and this will only get worse with the triggering of Article 50. Secondly there is a shortage of employees because skilled workers in countries where the UK has been getting construction workers from are not coming over because they have concerns about their status after Article 50.

Looks like we are going to have to find our own money and start training construction workers.

[Aunt Maud]

I think you need to look at levels of personal unsecured debt to get an idea of how deep the poo really is.

This might be interesting for you as an indication of the average British punters ability to obtain a low fixed rate, short term vanilla loan.

https://www.theguardian.com/money/2017/feb/10/are-car-loans-driving-us-towards-the-next-financial-crash

If products like this are the preferred way of obtaining finance for a depreciating asset like a car, I ask myself why that is and what kind of credit rating the average buyer needs to take out such a finance product ?

[ian]

Even we don't take a direct loan, credit cards are the same thing, used to pay for other classes of depreciating asset. Credit card debts are also repackaged into similar asset-backed securities and sold on.

On an average income, it's hard to see how families with a couple of kids afford a couple of £35k cars. Of course, they can't. Only the debt is affordable. And credit cards get rolled, taking advantage of the balance transfer. I know several people who have a growing credit card debt and no actual means to settle it. Anecdotal perhaps, but given the flush of 'interest-free balance transfers' offers I see every month, I figure a lot of people are doing it.

At the moment. Passing around debt is fantastic while the music continues to play. No worries though, as before the last financial crisis, there's plenty of people on hand to say how confident they are that – even though the debts can't be settled or covered by the value of the asset – there's something different about these debts that excepts them from conventional financial wisdom.

[Polar Bear]

Um yeah.   Sounds eerily familiar to the issues of sub prime lending and debt repackaging that lead to the 2007 crash.

Consumerism / capitalism kills itself but then rises like a phoenix from the ashes, again and again and again and again ...

[Canardly]

Well the debt bubble has to pop sometime. An awful lot of people are going to be hurt if interest rates rise. There are now people with mortgages who have never experienced normal interest rates of the 5% plus variety. Anyone remember 15.4%? We used to go into supermarkets to smell the meat counter.  Of course interest payments on the national debt. are hovering over everything, and are just mind boggling, at £68 Billion for 17/18. (Thats about a £1,000 a head folks, MW and C).

http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/

[Pickled Onion]

A recent survey of 1100 or so UK architects indicates that 60% of them have projects that have been cancelled or stalled due to the uncertainties arising from Brexit.

More context is needed. How many projects did they have and what percentage were cancelled? Were they mainly just after the referendum or more recently? How many normally get cancelled or delayed for other reasons? What kind of projects? Etc.

RICS data shows increasing confidence & outlook; obviously there was a massive dip just after the referendum but the construction sector has posted growing confidence ever since.

https://www.theguardian.com/money/2017/feb/10/are-car-loans-driving-us-towards-the-next-financial-crash

If products like this are the preferred way of obtaining finance for a depreciating asset like a car, I ask myself why that is and what kind of credit rating the average buyer needs to take out such a finance product ?

Interesting article - scary top half, non-scary bottom half. Click-bait? From the Guardian?

"British households borrowed a record £31.6bn in 2016 to buy cars" - in More-or-Less style, ask the question "Is that a big number?" Given there are something like 26 million households, the answer is No, not really.

Cars are a depreciating asset. Well, sort of. Lease companies pay heavily discounted prices compared to the forecourt price, then, looking at that crazy Chinese website people are paying around £250 a month for three years, that's nearly ten grand. Of course they are going to hedge against future interest rates by selling the debt as ABS, but contrary to popular wisdom, Euro ABS have been fairly sound through the crash, unlike US ABS and MBS. I really don't see this as a big issue.

[Polar Bear]

Perhaps a little context helps, but,

With all of the knowledge, tools and indicators available to the experts virtually nobody saw the last crash coming except the very risk averse who kept saying that the bubble was unsustainable.   For the rest it just appeared, bit them on the arse, kicked them in the cobblers, then nutted them.   

Given the political upheaval that we're facing in the west I cannot see stability in the market place.   Trump wants to tear the rule book up, the tories have always been supporters of less regulation and with Brexit, who the fuck really knows?

[Canardly]

Survey was undertaken on behalf of RIBA I believe.

[Aunt Maud]

Add to that the UKs' £67 billion credit card debt and the debt on their over inflated property, UK households owed £1.5 trillion as of October 2016 and this is expected to rise to £2.3 trillion in 2022.

You may wish to dismiss it as Guardian click bait, but a debt of £1.5 trillion and rising is a very real and very impressive amount.

[Pickled Onion]

I completely agree with you there. I'm just saying the car loan problem is tiny in comparison, and won't be the cause of the next crash.

[ian]

I completely agree with you there. I'm just saying the car loan problem is tiny in comparison, and won't be the cause of the next crash.

Probably not, but blending a modest proportion of bad loans into debt securities didn't work out so well last time. Our total debt load is growing and a substantial proportion is against assets that depreciate (consumer goods) or have a significant market risk (houses) and borrowing is on the presumption that interest rates and other market conditions remain extremely benevolent. All these debts are still being securitized in similar ways. Of course, this time it's somehow different, or so they say. I'm not entirely convinced.

Of course, we need the debt to support consumer spending on which the economy floats. A game that plays itself out globally, China having to buy up US debt so US consumers can keep buying their exports. Etc. It's all extremely fragile.

[Polar Bear]

Personal savings levels are not yet at 2008 levels but they are falling and for me this is ominous.   

We have for instance decided to invest in property works and reduce our savings on the basis that money in the bank is earning nothing but improving our home in practical ways including making it even more fuel efficient will give us a better longer term financial reward.

Halving our fuel bills on an ongoing basis without altering our way of life will we believe yield a greater benefit in 20 years than negligible compounded interest rates whilst investment growth remains stubbornly below inflation levels.   Our electricity is for instance due to rise by 12% if we don't do a bit of shopping around.  Yes, I know that there are some savings vehicles which pay more than 2% but most pay nearer to or less than 1% and, we don't have stratospheric sums to lock away for years at a time.

Whilst we are spending what we have we see all around us spending what the banks have.   Rather our position than theirs. 

[Asterix, the former Gaul.]

We have for instance decided to invest in property works and reduce our savings on the basis that money in the bank is earning nothing but improving our home in practical ways including making it even more fuel efficient will give us a better longer term financial reward.

Snap.  Insulated loft conversion (DIY) and new front door to replace draughty 1970s aluminium job. 

[Aunt Maud]

Don't fret we have the "Bespoke Tranche Oppourtunity".

It's a thing and this time it's different.

[Polar Bear]

Yeah, in name...   

[DuncanM]

From a consumer perspective, these things make a certain amount of sense.
1) The interest rate is fixed until the point at which the borrower can hand the car back, so there is no potential for interest rate shock, and handing it back at the end of the term is a lot easier than closing out a mortgage when the introductory rate ends.
2) The borrower is insulated from the depreciation risk by means of a "Guaranteed Future Value". If the value is higher, they can use the difference as a deposit on the next one, if it's lower then they can just hand back with no issues.

As has been noted, the risk is being taken by the lender. Often the lender is incentivised by (or a part of) the vehicle manufacturer, and they will often agree to take the vehicle onto their forecourts and sell it on, should the borrower hand it back. Asset backed securities measure risk using a foreclosure frequency loss severity model.  The problem in the 2008 crash was that the loss severity model was broken because it assumed rising house prices, and the foreclosure frequency model was broken because it assumed that foreclosures in different regions of the country (and different residence types) were not correlated. I don't know what the assumptions are in the auto-loans market - if they are making assumptions like "the GFV is a reasonable expected value at the end of the term" then there might be some pain on the horizon there (some manufacturers seem to be inflating the GFV to make the monthlies small (Nissan Leaf)). It'll need a combination of faulty assumptions before things really go wrong though, and IMO auto-loans isn't a big enough sector to bring the whole house of cards down on its own. Total household debt though...

Cheers
Duncan

[Polar Bear]

But wouldn't that financial model ultimately fail if demand nosedived for secondhand vehicles and thus prices on the forecourt were unrealistically high leaving dealers with lots of stock and nobody to buy them?   

Who will foot the loss if it happens and ultimately will they be able to afford to?

 

[DuncanM]

My understanding is that the lender/manufacturer sells the cars into a dealer if they are returned. So if they are over-valued on the paperwork, either the dealer or the lender/manufacturer is going to have to take a loss at that point to shift them. On cars like the Leaf that Nissan are currently offering inflated GFVs on, I suspect it's the manufacturer, who are taking the sale today and deferring the pain until later (rumours are there's a new version in the pipeline and they are clearing stock). I have no knowledge of the Nissan accounts, but I guess it's also possible that the finance part is the moneymaking bit anyway, and they are essentially an auto-loans company with a vehicle manufacturer attached.
Dealers are offering PCP deals on "used approved" secondhand vehicles now as well, so that's another way of kicking the can down the road and making money out of the finance deal while keeping the payments "affordable".

[Wombat]

... mortgages ... remember 15.4%?

When I bought a flat in 1978, interest rates were 7.5% but before the first payment became due the rate doubled to 15%.

I didn't realise they were that high in 1978, 'cos I wasn't in the market then (more into crashing motorcycles that I'd bought on borrowed money) but I suffered the "double whammy" in 1990.  Badger Lamont makes statement in house, interest rates up to 15%+ deathly silence in the office, that's because the phones aren't ringing.  We were a fair sized architectural practice in Winchester, building stuff for people who borrowed money to finance their projects, and then sold them to people who borrowed money to finance the purchase. Staff went down from 50 to 8, got told not to bother coming back after Christmas, and I was jobless with a mortgage that had pretty well doubled.  Took me years to pay back the arrears, after I got a job nearly a year later.  They started repossession proceedings the very day I got a job offer, that was a very close shave indeed...

Now, as an about to retire person with no debt, I'm desperate for a large interest rate rise so my investment that was intended to support me in my retirement might actually be worth something!  So the interest rates were high when I needed them to be low, and low when I need them to be high.  Thanks, financial meddlers!

I firmly believe there are reasons interest rates should be significant, partly to get potential borrowers to grasp that borrowing costs money, and needs to be considered seriously.

[Jaded]

'86 was the 14.5% year for me, I'd bought my first house and the mortgage rate doubled. I had to take a lodger in.

A few yeas later when we were moving an Estate Agent told us we could borrow far more money than we were asking for. I asked him to recast the figures with 15% as the interest rate. He shut up.

[Aunt Maud]

When interest rates do rise a lot of people are going to get the mother of all nasty shocks.

A brief squint at private debt to GDP shows that the level of debt is still at similar levels to 2007/8.

http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS

http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS?view=map

[Jaded]

'86 was the 14.5% year for me, I'd bought my first house and the mortgage rate doubled. I had to take a lodger in.

A few yeas later when we were moving an Estate Agent told us we could borrow far more money than we were asking for. I asked him to recast the figures with 15% as the interest rate. He shut up.

Although the bank rate graph I looked at didn't show this remembered blip!

[Aunt Maud]

Here's a nice little chart, look who's in deep shit.

https://data.oecd.org/hha/household-debt.htm#indicator-chart