Debt? No way!

Forty years ago when I bought my first house I was a tender youth of 21 years and the house was a three bedroomed semi-detached in a very wealthy suberb of Greater Manchester. No, I wasn't rich and I had a wife and child to support but I worked hard and saved and in those days it wasn't at all unusual for kids of my age to have a good income and house prices by our standards were very low. Saving up the 5% deposit we had to raise was the easy part; convincing our local building society manager that we were able to afford a mortgage was a different matter! Part of the reason I earned a good wage was because of the huge amount of overtime I put in but the building society recognised that the chance to earn extra money could melt away if there was an economic recession so they were only prepared to take a quarter of it into consideration. My wife was young and it was to be reasonably expected that she would eventually become pregnant again so only a quarter of her income was taken into consideration too. I was allowed to have two and a half times my annual salary on top of all this which meant that we could just about raise the princely sum of £2,660 and by the time we'd paid the deposit and legal fees we were broke but the proud owners of our new home! The rates bill that arrived a week later and which had to be paid a year in advance brought us down to earth with a bump and it was three months of mega overtime living on beans on toast before we could relax again. The carpets arrived two years later and a decent television a year after that; we had to save every penny to pay for them because there was a credit squeeze on but at least they were ours and like everyone else we were very uneasy with debt anyhow. We were undoubtedly the lucky ones; building societies in those days relied on deposits from savers so they could have money to lend out on mortgages so when the economy faltered and savings fell the mortgages dried up too. This stopped a lot of people from being able to buy their first home, prices continued to rise faster than deposits could be saved but they were still kept in check by people's ability to pay.

Today things are different. First a lot of building societies converted into banks; this allowed them to raise capital more easily but it also meant that they had a tier of shareholders who wanted a dividend on their investments. A long era of cheap interest rates meant that they could borrow huge sums on the international money markets to lend out not only on mortgages but on personal loans too; and the multiples of earnings which borrowers were allowed to take on as mortgages began to go up to three tines income, four and a half, even six or more times joint income for people whose incomes were expected to rise. Awash with funds these new banks pumped ever increasing sums out as personal loans to feed a seemingly insatiable market for credit until, finally, the bubble burst.

The cause could have been any one of a huge number of factors but the trigger was the collapse of the American sub-prime money market. Lending institutions had been shoveling out large sums as loans and mortgages to people who really couldn't afford to repay them but the theory was that as long as incomes and property prices continued to rise the risk of mass default was slight. Over-optimism indeed; incomes faltered, unemployment rose, house prices fell. Meanwhile much of the debt had been parcelled up and sold of to investors all over the world so when the crunch came the pain was felt worldwide instead of just within the USA. All of a sudden some once rock-solid financial institutions didn't look so solid any more; and one rock, Northern Rock to be precise, came close to collapse as depositors queued up to take out their funds at the same time that other banks refused to lend it the funds it needed to keep trading and it was only the support of the Bank of England which prevented a total collapse of this once respected and prudent organisation. Had Northern Rock gone under the consequences for the whole UK banking system could have been catastrophic but thanks to timely action the disaster was prevented - but was it, instead, merely postponed? The British are now the most heavily indebted people in the world; house prices are too high for most potential first time buyers to have a hope of affording one. Perhaps our economy will indeed have the soft landing that many 'experts' predict; perhaps on the other hand we are already staring into a financial abyss. Anyone for another personal loan, spend it today, up to 35 years to repay???

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