Friday, February 01, 2008

Money rant

I have tried to focus this blog on quilting - mostly because I realised early on that quilters liked to read me (Thanks guys!) and, because I like readers, I have focused on what you seem to like. But tonight I am going to have a little digress because (a) Natalie set me off because I agreed with her so much and she mentioned one of my pet topics (b) I may be underestimating you - maybe you will be interested in some other stuff than just quilts and (c) its my blog so I can :)
(but I won't again if you leave comments telling me to shut up!)

Natalie wrote:" I am enjoying some small amount of satisfaction in saying "I knew it, and I told them so," regarding the economy and the housing market..." then she gives links to excellent and funny journalism about the spending habits and housing market decline in the States. Well worth checking them out.

Well let me say, hallelujah, girl, I knew it and I told them too.

First let me vent about credit. Today I met a 35 year old woman who has £80,000 of unsecured debt and a mortgage of £27,000. She earns around £13,000. So who's fault is that? Some people say it is the lending institutions for handing it out. Indeed she said to me' They were throwing credit cards at me'. Indeed, it angers me that a crashing economy that might affect me and my finanically responsible life might be at least in part caused by irresponsible institutions.

But, that woman was intelligent. She was capable. She was not duped or over influenced (as I accept some people might have been). She chose to take that credit. I am not such an out of touch fat cat lawyer that I do not appreciate that on £13,000 pa its hard to make ends meet. I accepted that some clothes might go on credit, that some food at the end of the month might go on there. Emergency repairs for the car. But did she need a dishwasher? The three holidays to Greece? The European trips for the family following a football team around the European fixtures? The brand new car? And when she reached her credit limit was that the time to rein things in for a while? Apparently not, it was the time to get another card and use that card to pay off the first one....

I read a snipet in the financial section of The Times recently - a quote from Saga, the specialist provider for over 50's ( Or actually it could have been Help The Aged - but someone like that !) Their complaint was that pensioners were suffering poverty because a high percentage of them had not had a holiday for 4 years.

Whoah!! Lets think about that. We are not talking here about people who have suffered mental health problems or abuse as a child and end up sleeping in doorways. We are not talking about the immigrants we have who have fled persecution with the clothes they stood up in to arrive here and be labelled as 'bogus scroungers'. These are people who live in houses ( not refugee camps in Darfur) . They have clean water piped into their house ( unlike Babita one of my sponsor children in Nepal), they have free medical treatment ( unlike the millions of children with AIDS in Africa). They can go to free libraries. They are guaranteed enough money from the state for food and clothing and heating (with extra when the weather gets very cold). Not much like the victims of the Pakistani earthquake or the Asian Tusnami then. But, poor things, they did not get to go to Spain and ride pedallos in the sea.

Of course, I can talk - I had several holidays. I can see that there is inequality but inequality is not the same as poverty and what exactly it is and why we have it is a whole other blog rant. (But let me hint - in some circumstances it has a lot to do with people saving rather than paying card interest. In others it has a lot to do with how we see eating out as a basic, which we can afford to do because we are content to see waitresses being paid minimum wage. Although not if they come from Poland to take that job even though we don't want it because we couldn't afford to go on holiday if we were paid that wage.).

Our government refers to people being in poverty if they are in the lowest percentages of income. That again is about equality - on that logic if the average wage in the country was £1 million but 10% of people only earned £900,000, they would be 'poor'. Is this just a matter of semantics? I really dont't think so. I believe that words matter. I believe that we as a society have talked ourselves into a mind set where basics and necessities have expanded to include what are actually consumables and luxuries. And if it's a basic then it's OK to borrow to have it isn't it? How we define things does matter. I wonder whether if we stopped calling them 'credit cards' and started advertising 'debt cards' they would be so popular?

And then there is the housing market. Britain is obsessed with housing prices. The nation appears to have bought into several myths:

(1) Property is a sure thing.
I heard a celebrity interviewed about why she prefered property portfolio to pensions. 'It always goes up'.
The interviewer pointed out the huge property crash we had in the ninties. 'Apart from then, it has always gone up.' she retorted. (As I said, inequality is another rant so I am not going to address the tricky moral question of whether it is right to make millions from a commodity which is a genuine 'basic' but which one is helping to make unaffordable for a whole generation of working people.)

(2) A home is an investment
Yes, if you own a home you will need less in retirement because you won't need to pay rent.
Yes if you downsize you will release cash to spend. But I utterly depair of the clients who live in modest homes who tell me they bought for £17,000 and its now worth £200,000 and therfore they dont need a pension. A great investment. Yeah, great except for the question of where they are going to live when they sell it because every other modest home is worth the same too now.

(3) Buy to let is the way to millions
I have a barrister friend who invested in flats in Liverpool for her and her husband's retirement. Every single one in her portfolio is now in negative equity and she is running £100 per month short on each flat between rent recieved and mortgage going out. Why? Because Liverpool was designated city of culture, ouside buyers, many from London, piled in smelling property price rises. The market was pushed way beyond its natural balance and now the investors have gone and the locals can't afford to buy at the inflated prices.

(4) We won't have a crash in the property market. It might slow down but it won't fall
Apart from the last three months you mean? Look, here is how the property market works. The people who live in a house want to sell it. Lets say it is a small house. A starter first time buyer house. If it increases in price everytime it sells the buyers will have to earn more each time to buy it. But house prices have been growing faster than wages. So now we are at the stage where people can only just buy. They are borrowing for the deposit. They are borrowing high mulitples of income. They can do it, but only just. And not in all areas of the country. So, if they want to sell and make a profit they need wages to increase again. But they are not. Public sector wages increases are less than inflation at present.

So, maybe everyone will just stay in their house and it won't decrease in value. It will just be stagnant. Fine. Except some people will have to move. Some will die and it will be an estate sale. And some -those with £80,000 of unsecured credit say, will fall into arreas on the mortgage and the house will be re-posessed. Or, a couple get divorced and the court orders a sale. So the house will go on the market. And the buyer will say, we'd like to buy it but we can't afford your price. Not least because we are already paying for credit cards and student loans ( because yes, the governemnt actually forces students into debt while they get the education that gives them the skills to participate in the economy). And since in fact - depsite all the indexes and surveys and despite all the money divorce lawyers like me spend on vaulations - a house is only worth what someone will pay for it, the price will fall.

And then when it has fallen so that houses are affordable, what will happen? Well, they will probably boom again because people can then afford to subscribe to the myths and never ever learn from past lessons. Which to be fair is because we don't educate them enough. I have had to teach young trainee solictors how mortgages and pensions work. These are graduates. And then people get confused about products and which schemes are and are not tax advantagous. Which might be because the government changes the goal posts so frequently that even accountants say they can't give certain advice.

This survey from the Prudential includes some frightening statistics such as:

* 15% of 18-24 year olds believe that an ISA is an iPod accessory (For international readers an Individual Savings Account can contain either cash or stocks and shares and gives tax free interest. It should be the savings account of first choice)

* one-in-ten was unable to identify a mortgage as a form of debt (10.5%), while 15% of over 65s thought an inheritance was a debt.

* 45% do not know what a repayment mortgage is - a quarter (23%) believe it is made up of interest only payments.

It makes your head really really hurt. It makes you tired. Weary to the bone. Maybe that's why a recuperative package to Portugal is now a basic need.

PS I told you - blame Natalie. She set me off.
PPS I feel better now.


Quilt Pixie said...

ah, that was a rant worth having.... One of the pieces that boggles my mind, having chosen to earn a low wage and live simply for religious reasons, is how people think I'm poor. No, I don't have a lot of financial means -- but I do have a high education (including 2 graduate degrees, and most of a post grad) which leaves me with options. The poor are without options... If you CHOOSE to run a high debt, you're not poor! The conflation of needs and wants is prevalent in the society I live in though that many don't see that its a choice they're making.... and that, that is truly sad/pathetic...

Jacquie said...

Very interesting post. I so can relate because my 18 year old son went off to college and figured he could afford to live like his parents who both have good jobs. Bottom line...not able to tell the difference between needs and wants and spending money he didn't have. We all had a "come to Jesus moment" over the holidays and he is on a budget and paying his debt. Thank goodness we caught it before he was in too deep. I thought we had done a better job teaching the skills he needed...he's learning now!

Vicki W said...

Amen! This is a rant we have in our home often. I'm tired of the government bailing out people who have purposemy mismanaged their own money. We have completely lost any sense of personal responsibility. My husband and I are both around 50 and are close to being able to retire - house is paid for and no debt - and NO ONE understands how we could possibly quilt work now. It's called living within your means and it's relatively easy.

Jennifer said...

I thought and thought about this post, and didn't realize I'd never chimed in! Ken and I love having this discussion with people -- we're in complete agreement over the mess. I see people at our school (elementary school, private, for children ages 4 to 14) -- OK, they are choosing to send their child to a private school where they are expected to pay tuition and this is a choice; they could go to public school for free. But they can apply for and GET financial aid (that is, reduced tuition) based not on their income level but on their DEBT level! Argh!! So I know people who have pools, cleaning ladies, frequent vacations -- the lot -- AND they pay less tuition than we do since we are financially responsible! And they feel entitled to it! makes me insane....