Blogging about

Credit Crash Britain

In a series of special reports the Money Programme team investigate the issues that are affecting all of our bank balances: Credit Crash Britain.

Are there any two words more widely used right now than ‘credit’ and ‘crunch’. Every news programme brings further developments in the ongoing drama where the hapless audience sit and watch the story unfold, willing it to end but worrying what the ending will be.

We probably now understand more about the trading of risk than we ever thought we’d need or want to know, but I feel a little like a rabbit caught in the headlights of financial juggernaut. We can’t help but listen to the latest news, but what does it mean for most of us? Our pension funds are worth less, endowment policies are even less likely to meet the required amounts and many of us, who have long seen our homes as long term saviours of our financial well being, are developing distinct facial tics.

A year ago, my partner and I found the renovation project of our dreams and fairly quickly accepted an offer from a first time buyer on our own small, but perfectly formed, terraced house. Despite increasing nerves as house prices began to rapidly fall and some last minute bargaining by the buyer, we emerged unscathed, albeit with a wreck and a sizeable mortgage. Lots more work and money will now be needed to achieve basic comfort, let alone the ideal home.

Lady holding a miniature house.
[Image © copyright Photos.com]

We’ve been reasonably lucky, having arranged an earlier mortgage extension that we could draw upon as and when we need. Any meagre savings have long been pulled from their once ‘safe’ places in order to minimise future debt, and the mortgage rate has just fallen dramatically.

The builders couldn’t be more helpful, trade suppliers for large purchases are proving incredibly flexible and open to negotiation and all seems to be going well. So far, so good. But there’s a nagging feeling of unease that there are further upsets in store, and the prospect of committing to a further 20 years of debt, albeit cheaper debt right now, is a little unnerving. If we thought of our house as an investment before, I suspect that we, like many others, will now regard it first and foremost as a home.

On the other side of the fence, quite literally in our case, our old neighbours had been unable to get a buyer for over 15 months. Now, just six months after we completed on our house, they have accepted an offer £80,000 less than our selling price.

But who is the winner here? So they’ve taken a hit on their current house but they’ve also snagged a bargain on a bigger and better property which has fallen even more steeply in price. The big increase in mortgage which they had assumed they would need in order to upgrade is now not so big.

It’s been hard to identify any clear set of winners in this climate, but those determined to buy property rather than rent who are climbing up the housing ladder, as first time buyers or moving into bigger properties seem to be in the frame.

Plenty of provisos to this though … if new mortgage funds can be readily accessed at the lower rates, if the threat of job loss isn’t imminent, etc. A few months ago, savers were being hailed as the clear winners of the credit crunch as banks tried to improve their balance sheets. Expectations were that this would change over time, and this is now the case, with savings rates falling and those relying on equity or shares as investments and income generally feeling the pinch.

On a more positive note, the impact of the credit crunch may prove to be a much needed catalyst for some. Long held dreams of making a significant change in career direction become less of a big step into the unknown in the face of redundancies.

Economic downturn has previously led to an increase in applications for university or college places as many seek to re-skill or upskill themselves in the uncertain job market. With student fees fixed until 2009, this may well feed a move for many back into education as a way up and out. Although not a path that many would actively seek, an enforced change could be the silver lining for at least some. 

Listen to this blog post on our Money & Management podcast.

Courses

• You and your money: personal finance in context
• Investigating entrepreneurial opportunities 
• Learning to change

Take it further

• You and your money interactive
• Happy workers
• Letting property profit
• Change in career direction

About the author

Dr Sharon Slade is a senior lecturer and Regional Manager in the OU Business School specialising in online teaching and learning. She has a PhD in mathematical control theory and previously worked for 11 years as a mathematical modeller and manager for an environmental consultancy.

Subscribe to Sharon Slade's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

At the Open University I have a colleague whose costs for taking the train from home in Manchester to the office in Milton Keynes are not a lot different from mine, flying from Andalucia. I'm sure Mancunians would understand why I prefer the sun and blue skies of the Mediterranean (not to mention the good red wine at £2 a bottle). The chance to do this is part of the gain that comes from the occasional pain of being part of the European Union, and it is a very attractive proposition, given the right kind of work.

Even so, there are a number of things that you should be aware of when assessing whether it is a practical proposition in your case. The opportunity exists because of cheap air fares and cheap property outside the UK. However, in effect it is there because the market is slow to adjust, and over the medium term house prices will probably rise to reflect the price differential between the costs of commuting internationally and locally.

The same equation includes cheap air fares, and here there is a risk that the airline will reduce its services or put prices up. The cheap British airline operating into my local airport (Granada) dropped from seven flights a week to four last year, meaning that now I have sometimes to drive for two hours to Malaga, or buy more expensive tickets from a regular airline.

The housing is cheap, but getting any work done on a house is a nightmare. If you just want to replace a leaky roof, you need planning permission. The Spanish building culture is such that no job is refused. The builder says they will start at once, they arrive, remove the window you wanted replaced, and if you don’t badger them constantly, it could then be six months or more before they turn up with the new window.

Of course, you have to speak Spanish to be able to handle all that, so a lot of time and effort has to go into that. If you do not speak enough Spanish, you’re forced into the hands of expat builders, who may or may not know much about building, and are quite likely to get you into trouble with the town hall as well.

You need to be clear whether you are going to aim to work in the UK (or elsewhere) or create a business locally at the same time. Around where we live there are lots of expats who have decided to set up a business locally. This is sometimes disastrous, often not only for them but for their clients as well. Often they are realising a dream, but have neither training nor experience for their new work, such as the hairdresser who bought a bar, or the insurance agent running an unlicensed taxi service. Expat businesses are rarely efficient and often illegal. People significantly underestimate the cost of being properly registered to trade in Spain, where the red in the national flag reflects the red tape which is everywhere. Most of these businesses fail or bump along at subsistence level, until the town hall or the tax office catch up with them.

Being a Euro-commuter can be lots of fun, and you can have a great life. But you need to be prepared to work hard to get it set up, and spend a lot on professional advice – only after that can you sit on your sundeck with a glass in your hand. Cheers!

Further reading

• 24 hour working – discover what’s driving our long hours culture, and how it impacts our health
• Join the discussion – would you commute from another country?
• Dream Commuters – The Money Programme investigates the British workers who are moving to other countries, but keeping their jobs in the UK

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

Subscribe to Peter Walton's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

You’d think that a service that cuts estate agents out of the house-buying process would be hailed as the best thing since sliced bread. Such services already exist, and can save you thousands of pounds, yet for some reason they have yet to make any significant impact.

The Money Programme 'Beat the Estate Agent' explores the growing range of alternatives to the traditional high street approach to buying and selling houses. These include a number of internet-based services, as well as leading supermarket chains, all keen to grab a slice of the market.

"Estate agents have seen their fees skyrocket tenfold in the last 25 years"

Estate agents have seen their fees skyrocket tenfold in the last 25 years, without doing a jot more work. In addition, many customers complain of dubious practices and poor quality service. Against this backdrop, it’s not surprising that some see this market as long overdue for change.

The internet has transformed the way we buy and sell most things. It has proved exceptionally successful at disintermediation, which is the ability to cut out the middlemen, especially where they’re seen as adding little or no value to the supply chain. So could it damage estate agents’ stranglehold on the property market?

The internet offers alternative business models which are attractive to house sellers in a number of ways, and a growing band of sellers are eager to switch. But this doesn't appear to be enough in itself to change this marketplace.

Very few innovations that rely solely on technology are successful. Technological innovation must be matched by market need, and so far house buyers seem reluctant to embrace this change. This acts as a brake on private sellers who would rather have a sale with a hefty estate agent’s fee, than no sale at all.

It’s not clear why buyers are slow to take up these new opportunities. Whilst some 70% of people now search for their next home online, many people still seem to be uncomfortable with the notion of engaging in direct negotiation with vendors.

Understandably, estate agents are not keen to see any growth in private sales. They suggest that sellers will lose out by not realising the full value of their property and not having an agent to manage viewings and screen-out undesirables. As Peter Bolton-King, chief executive of the National Association of Estate Agents, puts it “if you are selling it privately, any Tom, Dick and Harry can just come round”.

Much of the competitive advantage that estate agents have comes from controlling the flow of information at the various stages of the house buying process. However, this is gradually being eroded. For example, the Land Registry decided a while ago that the prices paid for homes must be made public. So both sellers and buyers can find out exactly how much was paid for other houses in their neighbourhood.

The availability of this information helps private sellers place an accurate value on their properties, effectively deskilling the estate agent’s role. Hopefully, as more information enters the public domain the house buying market will be exposed to more transparency, which (in theory) should be good for customers.

"The role of the estate agent could be on the cusp of a radical transition"

Everything suggests that the role of the estate agent could be on the cusp of a radical transition. But it’s not yet clear what will be the tipping point which will push the old business model aside. Until then I guess it’s business as usual.

Further reading

• Beat The Estate Agent – The Money Programme investigates some surprising alternatives to estate agents
• Network effects – new technology doesn't succeed or fail on its own merits
• Money and Management Forum – would you buy a house online? Or trust Asda to sell your house?
• War breaks out on the home front as old and new estate agents clash
• ThisIsHousePrices.co.uk
• The Rise of the Network Society: The Information Age by Manuel Castells, published by Blackwell Publishers

About the author

Matthew Hinton is Senior Lecturer in Information Management at the OU Business School. His research addresses the impact of e-business on operations and information technology evaluation, especially the performance management of e-commerce applications.

Subscribe to Matt Hinton's posts