What will happen in 2009? [30/12/2008]
1. In the UK economy? Well, these are exceptionally hard times. We are probably around half way through the current crisis - which has been going on already over 18 months. So we can expect a tough 2009 and things to start picking up in 2010. Companies that shed staff early and have conserved cash will do well in the upturn: lean and fit and with finances available to buy up other companies or assets at knock-down prices. A lot of fuss has been made about the fall in the pound but this will be really good news for any company that sells goods or services outside the UK, and will also mean that people spend more at home whether on holidays or other things.
2. The UK housing market... should we sell up or stay put? Is renting a good option right now? Will housing become realistically affordable again? Each person's situation is totally unique but here are some general thoughts. The house market is likely to continue to fall sharply, but will eventually bottom out. The lower the falls are, and the lower mortgage interest rates go, the more likely it is that we will see a rebound and a strong recovery, as many people decide to come back into the market or to enter for the first time. A lot has been written about mortgage markets changing forever, but that is unlikely. The fact is that the mortgage market will eventually settle down, and will become attractive and competitive again. Once lenders become convinced we are in the early stages of a long and strong property price recovery, we will see loan to value ratios become more relaxed, and the return of 90% mortgages. Home loans are the largest and most important financial transaction most people do in their lifetimes apart from personal pensions, and so will become once again a very important part of retail financial services.
There is no point in selling a property at the moment unless you are forced to especially while lending is in such chaos because it means even if you find a buyer, they may not be able to complete purchase. Mortgage rates are continuing to fall and some people on trackers are already paying less than 2%. Even if the Bank of England base rate remains the same for the next 3-6 months it is likely that mortgage rates will continue to fall because the normal adjustment mechanisms linking base rate to mortgage rate are broken and will take another 6 months to fix.
"Remember that the cost of selling and buying again is high with legal fees, stamp duty and the rest. Rents have not fallen as fast as house prices yet in many areas so renting is more expensive than you might think. Housing is already more affordable than for years - we have seen salary inflation of 3.5% or more in the last 2 -3 years, while actual property prices have also fallen up to 15%. Put the two together and you have around 25% fall in costs ? and that is before the mortgage rates started falling, already by 30% in some cases. When you look at the whole picture it seems likely that in 6 months time we will see some wonderful bargains, with an actual cost of ownership per month of less than half what it was just 18 months ago. But first time buyers will still need a larger deposit than in the past. Remember too: most people own to live in a home and not for a 2-10 year investment. It is vital to take a long term view in all property decisions."
3. The UK job market.. what kind of industries are the most likely to make drastic job cuts? What are employment chances like right now if you lose your job?
"Retail jobs will be very hard hit in January to June as the reality begins to hit home. McDonalds, Lidl and others trading towards the bottom of their markets will continue to do very well. The jobs market in many sectors is surprisingly strong with 850,000 vacancies that are officially known about in December 2008. In previous downturns it has been unusual for well motivated and talented people to remain out of work for more than a year."
4. The credit/borrowing markets... will we be able to wean ourselves off our addiction to cheap credit? Will we learn the lesson and start to save more?
"These things are just cycles. We are just about to enter a new cheap credit boom, fuelled by the lowest borrowing costs in living memory. The result in the medium term is likely to be another overshoot, high inflation, high interest rates, eventually leading to another crash which could happen by 2015. As we have seen - swings can happen very fast from one end to the other."
5. The world economy... what affect will the world economy have on us all? What about £ sterling and our travel/work abroad?
"The global economy will continue to lurch from event to event. All eyes will be watching the price of the dollar. Despite the massive US crisis the dollar has retained or increased value against many currencies, as billions of dollars of US investments in other nations are brought back home to service debts and other urgent commitments. Eventually these massive return flows will slow down. When that happens the big question is who will still want to buy dollars? Countries like China have bought over a trillion US dollars and are holding them for now. But what if they start selling? They cannot sell too much or they will force a dollar crash and the rest of their assets will be worth a lot less. But they could sell enough to force a gradual dollar decline."
Source: http://www.moneyhospital.co.uk. Copyright Acknowledged.