A recession of surprises

The 2008-2009 recession wasn`t the first - and it won`t, unfortunately, be the last. A lot of bad things have happened, from rising unemployment to record levels of personal insolvency, but it hasn`t been all bad news.

Many of the dire predictions we saw at the start of 2008 simply haven`t come true (so far). Three of them in particular spring to mind:

1. House prices plummeting
2. Repossessions rising
3. Debt levels increasing

Here`s a quick look at the facts & figures, along with a few thoughts on why things have turned out this way.

1 House prices

What?

Peaking at £186,044 in October 2007*, the average house price didn`t actually `fall off a cliff` as so many had expected. It did drop by about 20% (to £147,746) in February 2009, but since then it`s climbed back up to £163,481 (in January 2010), just 12% down from the peak.

Source: Nationwide House Price Index

Why?

There`s no single reason house prices have held up better than expected. The three most important ones are probably:

a) Low interest rates. The base rate has stayed at 0.5% since March 2009, taking a lot of pressure off homeowners with variable-rate / tracker mortgages (and new fixed-rate mortgages).

b) Lender forbearance. Mortgage providers have made a point of seeing repossession as a last resort, and have tried to help homeowners in difficulty find a way to stay in their home.

c) Lower unemployment rate than expected. Many people have had their hours or pay cut, but fewer than expected have actually lost their jobs. In fact, many experts say people have been able to keep their jobs because people have taken a cut in their hours/pay - the workers of many businesses have essentially been `sharing the pain` among them.

Altogether, that means fewer people have had to sell their homes, so the housing market hasn`t been flooded with properties for sale - something which would be sure to push down prices (the law of supply & demand means that the price of any product is more likely to drop when there`s more of it available).

As it stands in the UK today, there are plenty of would-be buyers, but not too many would-be sellers. When they`re not forced to sell, most people would rather wait and hope that prices will rise again - something which can, in itself, help keep prices high.

2 Repossessions

What?

Back in November last year, the CML (Council of Mortgage Lenders) said it expected 48,000 repossessions throughout 2009 as a whole - far lower than the 75,000 it predicted in the previous year`s housing market forecasts.

Looking ahead, the CML reckons we`ll see 53,000 repossessions in 2010 - assuming interest rates remain low and the Government keeps on supporting mortgage holders who`ve run into difficulties.

Why?

The CML cut its forecast to 48,000 `in recognition of lender forbearance, government measures and the beneficial effect of continuing low interest rates which are helping most borrowers facing difficulty to keep their homes`.

Low interest rates alone have made a huge difference to many people`s finances through the recession. The base rate has been at 0.5% since March 2009, saving many homeowners hundreds of pounds every single month. Even though a lot of them saw their incomes drop during the recession, their lower mortgage payments helped them cope.

However, the base rate can`t stay at that level forever. When it does go up, it`s bound to make things a lot harder for the millions of homeowners with variable-rate or tracker mortgages - and anyone who needs to find a new fixed-rate mortgage.

3 Debt levels

What?

In 2009, Britons paid back a lot more unsecured debt than they took on. In January, we collectively owed £233.2 billion; in December that figure was down to £226.5 billion. The table below shows the monthly `net lending` figures. That`s the amount that was lent out minus the amount that was paid back - so negative figures mean people collectively repaid more than they borrowed.

	Change in outstanding unsecured debt (£ millions)
Jan	+151
Feb	+82
Mar	-31
Apr	+213
May	+198
Jun	+63
Jul	-328
Aug	-370
Sep	-241
Oct	-554
Nov	-379
Dec	+52

Source: Bank of England`s `Lending to Individuals` statistical release

Another important `debt` figure is the default rate, which shows how many people aren`t repaying their debts as they agreed to. As the Bank of England says in its Trends in Lending - January 2010 report, default rates on unsecured credit actually fell in the fourth quarter of 2009, even though lenders expected an increase.

Why?

There are two basic reasons debt levels can drop - and in this recession, both have played a part.

Lower availability of credit

Since the financial troubles began, lenders have simply been less willing to lend. As the Bank of England says: `A net balance of lenders in the 2009 Q4 Credit Conditions Survey reported a continued reduction in the availability of unsecured credit to households, partly reflecting a reduction in their appetite for market share and for risk`.

Lower demand for credit

Major lenders have told the Bank of England that demand for unsecured credit has remained `subdued` (partly because so many people have been determined to reduce their level of debt, rather than taking on more) and that they expected it to stay like this `in the coming months`.

In fact, the Association of British Insurers carried out a survey and found that in Q4 2009, 42% of respondents said they were repaying their non-mortgage debt faster than previously. People aren`t just borrowing less - they`re also repaying more.

Plus, now that savings accounts are paying so little interest, many people have simply stopped saving - and they`re using that money to pay off their debts more rapidly.

The Bank of England`s Trends in Lending - January 2010 report says that default rates on unsecured credit had fallen in the fourth quarter of 2009 as a result of (according to some major lenders) the earlier tightening of lending standards and the lower-than-expected levels of unemployment. The lenders did point out, however, that unemployment is expected to rise - and that credit availability is expected to remain quite limited.

So - what`s next?

1) After the recession comes the recovery. The economy grew by 0.1% in the final quarter of 2009, according to the Office for National Statistics, officially ending the recession. But there`s a lot of uncertainty around the figure for the first quarter of this year - a lot of worries about the possibility of a `double-dip` recession.

2) R3, the insolvency trade body, has warned that personal insolvencies could well keep on rising long after the recession is over. When the 90s recession finished, it took another 18 months for personal insolvencies to peak - and after the 80s recession, it took 3 years...

3) And finally, we can be (virtually) sure that:

• Taxes will rise, as the Government tries to bring down the country`s debt.
• The base rate will rise - leaving it at 0.5% for a long time isn`t a good idea, and the Bank of England will be under a lot of pressure to raise it if inflation starts rising. However, raising the base rate could threaten the recovery, so it`s a delicate balancing act.

So on the one hand, the country`s economy as a whole could be `on the up`. On the other hand, that isn`t certain - and even if it does keep improving, that won`t necessarily translate into good news for people who are having their finances squeezed by higher taxes and higher mortgage payments.

* Different organisations provide different figures about house prices. All house price figures quoted here are from the Nationwide House Price Index.

Tags: house prices, economy, recession

Fees payable when continuing service is provided. Repaying debt over a longer period may increase the total amount to be repaid. Calls are recorded and are usually free from UK landlines. Mobile phone users may be charged and should check with their service provider.