454: UK Property Debt Situation - Public and Private Sectors
We thought it would be helpful for property investors to take a look at an overview of the UK finances. The public and private sector debt and some simple ratios. The we can draw a few conclusions:
- The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts.
- Public sector net debt was £1,068 billion (Oct 2012), 67.9% of GDP
- Public sector net borrowing (annual deficit) is £121.6 billion for 2011-2012 or 11% of GDP.
- Public sector net borrowing forecast (annual deficit) for ~ £127 billion for 2011-2012 or 11.5% of GDP.
- Public sector net borrowing was £8.6 billion Oct 2012; this is £2.7 billion higher net borrowing than in October 2011, when net borrowing was £5.9 billion
- If all financial sector intervention is included (e.g. Royal Bank of Scotland, Lloyds), the net debt was £2,311.6 billion (147.3% GDP) - this is known as the unadjusted measure of public sector net debt
- UK private sector debt £7.5 Trillion
- UK house value £4.3 Trillion (total housing stock)
- UK housing mortgage debt £1.452 Trillion
- UK GDP is £1.65 Trillion per annum
- Average GDP per capita (or person) is £27,500 per annum
- The average mortgage assuming 23 million homes is £63,000
- The average mortgage payment assuming 5% variable rate per month is £260
- Recent quantitative easing – or money printing amounts to £375 billion (or 25.6% of total mortgage debt, or 22.7% of annual UK GDP)
The UK private sector debt is gigantic. This is the level of debt large UK bases banks have on their books. This is probably the UK's biggest problem - it is home to big banks with huge leveraged debts that were run up in the "good times" from 1998 to 2007. The UK government and tax payers stepped in in 2008 to bail many of them out, but the sheer size of this debt is too much for any government to handle. They should have been left to collapse and rebuild/restructure, but instead, these semi-zombie banks - the so called "too big to fail banks" will continue to drag down the UK economy as the government struggles with the added debt burden taken on.
The mortgage debt is only 33.7% of the value of the total housing stock. This is not particularly high as long as their is not a house price collapse. The Bank of England appear to have a strategy of printing money to prop up the housing market, and combined with the very low interest rates, this is preventing a house price collapse or crash. As long as interest rates stay low, which is certainly not assured, then house prices should remain at current high levels.
The level of government debt is rising and is now 67% of GDP. This is far less than after WWII when it stood at 200% of GDP. It is though getting dangerously high - any government debt above 90% is well into danger territory.
As long as the government can continue to print money and meanwhile keep the UK Sterling from collapsing, then it will continue to be able to offer rates of close to 0% and hence banks charge mortgage holders a whopping 4%. But this is still considered fairly low by historic standards, though the differential between Bank of England rate and mortgage rate is at a historical high.
The UK has negative savings rates, and the rate of inflation is running close to mortgage rates. This means as long as the Bank of England can prevent a house price collapse, then wealth will be extracted from savers and the poor to pay for mortgage holders and feed the banks - prop up the zombie banks. Eventually, as the debt is eroded by the fairly high inflation and property prices remain high, then equity value should incease and debt burden in real inflation adjusted terms should decrease. This will mean property owners with high mortgage debts should do well in the long run. This is one reasn why property prices remain high - in the expectation the Bank of England will keep property prices propped up. After all, if house prices collapse, consumer spending will crash because of reduced confidence and a recession will start. They know its only by propping up the property market that the 70% GDP in the services-consumer spending sector with its associate employment can be kept stable. This is why is unlikely the Bank of England will sit and watch while there is a house price collapse. The BoE will continue to print as much money as it takes to keep the stock market and property markets propped up by feeding ulta-cheap money to the semi-zombie UK banks.
The thing to watch is the UK bond markets - and rates they UK government can sell its new debt at. If rates stay at current low rates of ~2.4%, then there will not be a big problem, particularly if UK Sterling remains at reasonable strength against the US dollar and Euro. But if the bond or treasuries rates rise to say 4% and/or the UK Sterling collapses (these are most likely to go together if they go at all) - then mortgage rates would have to rise, then house prices could collapse. The UK can old print money because its currently has little effect on the value of Sterling or Treasuires rates - because the government maintains credibility when compares with many European and US central banks and governments. But this can change rapidly - particularly if the UK has a debt downgrade and the markets don't like it. A one mark debt downgrade is probably already priced into the UK Sterling, but we are dealing with markets here and no-one knows for sure.
So for 2013, keep an eye on UK Treasury rates (hopefully stays low), Sterling value (hopefully stays high), mortgage interest rates (hopefully stay low), employment (hopefully stays high) and money printing (to match the GDP expectations). So far the Bank of England is steering a tricky course through this terrible situations - they should never have bailed bad banks out - but now they have this additional debt burden, they seem to be printing the money to pay for it, which means people with debt get an easy ride, savers are destroyed, home owners win and renter have to pay higher rents as mortgage borrowing remains limited and difficult and investors avoid the property market.