The biggest short term threat to the economy is a downward spiral of house prices warned a Bank of England rate-setter earlier this week. Combined with a drop in mortgage lending this could be the death knell to hope that the UK economy will weather a recession. However, Kate Barker of the Bank of England Monetary Policy Committee also added that rate cuts are hard to justify in the face of inflationary pressures. She pointed out that a decline in property values and 'the consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation'.
The Treasury, meanwhile, enjoyed a £6.5 billion windfall last year due to higher house prices. Stamp duty has trebled in the past 5 years, bringing the number of houses subject to a higher rate of duty to 5.5million. Ten years ago, only £830 million was paid in stamp duty, according to the Halifax who revealed that buyers in London and the South East are hardest hit, paying on average 3 months salary in stamp duty.
Buy to let landlords who hoped to cash in on the house price boom are faring less well. Their gamble that the property boom would be an on-going one has failed to pay off as the price of new build flats heads for a 'full scale crash'. Analysts Dresdner Kleinwort Wasserstein suggest 'reckless lending and over-building of flats threatens recession because a bubble had been stoked by highly speculative (and potentially highly suspect) development, lending and valuation practices which have led to over-supply of flats in cities across the country.'
However, despite the unsettled market conditions, gross mortgage lending did lift slightly in January, although 125% mortgage deals may be a thing of the past. Lenders are withdrawing deals for 100% plus mortgages as they feel the pinch. Many banks have been affected by the slowdown in the US housing market and the subsequent increase in sub-prime mortgage defaults. Alliance and Leicester were the most recent institution to announce a drop in annual profits. They reported a 30% drop and predicted a challenging year ahead. Their pre-tax profits fell from £569 million a year to £399m in 2007 after they wrote down the value of their exposure to risky assets. Lloyds TSB also announced a fall, with their profits dropping 6% to £4bn.
One company did report a massive profit was British Gas, who are to be part of a probe by energy regulator, Ofgem. Widespread public outrage was reported after the company reported a jump in profits from £95m in 2006 to a massive £571 m in 2007. Amid mounting criticism of the energy companies (who have all recently implemented large price rises), Ofgem's Chief Executive, Alistair Buchanan, announced 'The decision to conduct the probe is in response to public concern about whether the market is working effectively. We are concerned about the increased volatility of wholesale prices and we want to investigate how European and other global energy market developments are affecting energy prices in Britain.'
With consumers becoming ever more aware, plans to increase the financial know how of 16 to 25 year olds are in motion. They will be given advice on money matters, basic definitions of financial terms such as APR and ways to avoid unscrupulous financial lenders. Citizens Advice and YouthNet have teamed up for a £300,000 scheme funded by HBOS Foundation due to be launched in late April or early May. Half a million young people will be targeted through web content, podcasts and their mobile phones. With Google overtaking the BBC as the UK's most recognised brand, technology is considered by far the best way to reach them.