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Five steps government could take to survive the coming economic shock

by Andrew Lett (2020-10-10)

An economic storm of toxic proportions is brewing in Britain.

The UK is already in a recession of historic magnitude. Economic growth plunged between April and June by a record 20.4 per cent, following a contraction of 2.2 per cent during the first quarter. 

It  could have been considerably worse without the support schemes rushed in by the Treasury as the country went into lockdown in March. So the dire figures barely registered in the markets when the Office for National Statistics reported them earlier this month. 

But the provisions put in place by the government in response to the coronavirus pandemic and social lockdown are coming to an end.   

 An economic storm of toxic proportions is brewing in Britain - but there is a way out

On 20 September, the ban on tenant evictions will end. While the minimum eviction notice period landlords must give tenants has been extended to six months until March next year, make no mistake that notice will be given where tenants are failing to pay their rent. 

Many thousands of people will know within weeks whether they must find alternative accommodation by Easter next year. For some that will raise the prospect of homelessness.

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A little over a month later on 31 October, the government's Coronavirus Job Retention Scheme closes. Furlough no more.  

The very same day, payment holidays on mortgages, loans, credit cards and car finance come to an abrupt end. 

The Financial Conduct Authority issued 'guidance' to lenders yesterday, indicating that borrowers who cannot resume mortgage payments at this time should be offered alternatives, including extending the repayment term or restructuring their mortgage.

 Thousands of people will know within weeks whether they must find alternative accommodation by Easter next year

'Where consumers need further short-term support, firms should offer arrangements for no or reduced payments for a specified period to give customers time to get back on track,' added the watchdog.

However, those who need reduced or suspended payments past this point will no longer benefit from a clean credit report.

The FCA has been clear: 'Where borrowers require further support from lenders, either at the end of payment holidays under our guidance, or where they are in need of support for the first time, this would be reflected on credit files in accordance with normal reporting processes. 

'This will help to ensure that lenders have an accurate picture of consumers' financial circumstances and reduce the risk of unaffordable lending. Firms should be clear about the credit file implications of any forms of support offered to borrowers.'

Millions of British households are now in arrears  

Help will be forthcoming, but the chickens will come home to roost. 

UK Finance figures show that since the launch of the payment deferral schemes, lenders have granted a total of two million mortgage payment deferrals, 1.05 million for credit card payments 707,000 for personal loans.

Lenders have also applied more than  27million overdraft buffers to primary current accounts. 

Initial industry data suggests that of those whose mortgage payment deferral has come to an end, over 70 per cent have resumed making full payments. That leaves up to 600,000 who have not.

A payment holiday might sound like a nice break, but the fact is those who take one are now in arrears. 

While the government negotiated that this wouldn't leave a black mark on credit reports, it cannot stop lenders from requesting bank statements when a new loan application is made. 

They can reject on the basis of a history of late payments. 

This means that millions of people in the UK are in arrears on some form of debt. And yesterday's guidance from the FCA says that this should be taken into account by lenders. 

Lenders have now been explicitly told that where it's clear borrowers can't afford their loans, a decision must be made on how to deal with those debts 'going forward'. 

If that means selling up and downsizing, or moving to rented accommodation to avoid running up mortgage debt that exceeds the value of your home, then so be it. 

Except it's not quite so straightforward. If a borrower has to sell in this scenario, it's highly likely they won't pass affordability and credit checks when it comes to getting a new, smaller mortgage.

Rental screening is also considerably stricter than it once was, meaning that same person could also find it hard to secure a rented home. A significant number of people could fall into this bracket.  

The latest figures from the Office for National Statistics out this month confirm that a total of 9.6million jobs were furloughed for at least part of the period between March to June. 

An estimated 750,000 people minimum have already lost their jobs as a result of the coronavirus pandemic and its effect on the economy. More job cuts are inevitable as companies adjust to their changed circumstances.

So what happens next? 

Chancellor of the Exchequer Rishi Sunak has proved bold in his policy measures so far

What we end up with largely depends on what the government chooses to do in the next four weeks. 

If they do nothing and furlough, payment holiday and eviction ban measures are wound up - scenario one - then millions of people are going to be unable to pay their rent or mortgage. It will take months to unfold, but people will lose their homes.  

Those lucky enough to keep their jobs and make their mortgage payments won't escape the fallout. 

 It will take months to unfold, but people will lose their homes

Mass redundancies lead to a spike in those unable to pay rent and mortgages. That leads to mass evictions and mass repossessions. 

Both of these result in a flood of properties onto the market in what amounts to a firesale. Property prices could plummet.

And that leaves even those in a stable financial position at risk of falling into negative equity where their mortgage debt is larger than the value of their home. 

Exacerbating things further, banks and building societies will be really reluctant to lend, choking the rest of the market - even where it was previously healthy.    

Scenario two is that the government extends these schemes again. But this amounts to hitting the snooze button, and that will barely diminish the economic implosion. 

Minimise the pain to come 

Scenario three is the one that government must aim for. The reality is that the UK is mired in debt and will be for decades to come. Jobs will be lost. Rent and mortgage payments will be missed.  

They have to find a way to deal with this that causes the least amount of pain. 

Telling lenders to 'exercise forbearance' and let people stay in their homes might be a temporary salve, but long-term this approach could wreak more damage on households than a short, sharp shock. 

Banks also have a legal responsibility to protect shareholders. What happens to a bank's stability and value as a going concern - something which has by law to be assessed once a year in a listed company's annual results - if half of their loans are not being repaid? 

Commercial enterprises cannot just carry billions of pounds of consumer debt unless the government and/or Bank of England agrees to underwrite it. 

So what is the solution? Here are some ideas that would provide us with a route out of the mess.  

1. Support for mortgage interest

This is not new: a benefit paid to those struggling to pay their mortgage, introduced in 1995 following the recession triggered by Britain's exit from the European Exchange Rate Mechanism.

Interest rates were sky high, house prices plunged and repossessions were rife.

SMI has been scaled back gradually over the past 25 years - it is now a loan

SMI has been scaled back gradually over the past 25 years and in April last year, the government scrapped it, replacing it with a loan that beneficiaries would have to repay when their home was sold. 

Reinstate SMI as a benefit from 1 November. 

Currently only those who already claim certain benefits are eligible to claim SMI, so  broaden it out to apply to anyone who has lost their job after being furloughed and make it available for a fixed term. 

Raise the minimum mortgage amount eligible to a reasonable threshold that reflects those in need of help. Analysis done by UK Finance shows the value of the average interest payment deferred each month under mortgage payment holidays is £260.

The average value of suspended payments per month is £755, calculated using the average interest rate of 2.37 per cent on an average loan size of £132,128 in the UK. These figures are correct as of 31 December 2019. 

It doesn't need to be permanent: just give homeowners breathing space to find new employment or retrain, and for the economy and confidence to recover.  

2. Reinstate tax relief for landlords 

Helping landlords is now considered deeply unpopular - even for a Conservative government. But helping landlords helps tenants. And right now, it's critical. 

Government has a choice: pay for those who can't pay their rent through universal credit or pay landlords in tax relief on their mortgage payments

Government has a choice: pay for those who can't pay their rent through universal credit or pay landlords in tax relief on their mortgage payments.

Both options put taxpayers' money in the pockets of landlords. And that's the fault of government for failing to provide sufficient social housing over the past 30 years. 

It doesn't have to be forever. It has to be for the duration of this government so that the economy has time to get back on its feet.

Supporting landlords in this way will give them considerably more flexibility when it comes to being lenient with late-paying tenants. It is also far less of an administrative headache for those doling out universal credit payments.

3. A year's support for renters

Let's just walk through this: a tenant in the private sector loses their job, falls behind on rent, is served an eviction notice by their landlord and has to move out by the end of March 2021. 

They can't get approved for a new rental, even a cheaper one, because they won't pass affordability checks without employment and an income. So they go on the already massively oversubscribed social housing list.

In all likelihood they are put either into a bedsit, probably costing the council more than they were paying in rent, or into another private rented home. They are given universal credit, after a six week delay, to pay a private landlord rent.

It costs the taxpayer money, creates huge uncertainty and emotional distress, exacerbates the disinclination of mortgage lenders to lend against buy-to-let - and ultimately, leaves everyone in a worse off place. 

Instead, provide a temporary support for rent benefit to those who have lost their jobs following furlough, for a fixed period of a year. Give everyone time to make new plans. 

4. Establish a National Housing Bond 

Ministers have time and again referred to the coronavirus pandemic as a war. 

Hears of War Bonds? During the Second World War government issued debt securities to finance military operations and domestic production, appealing to the public's patriotism to invest. 

A national housing bond offered through National Savings & Investments that pays a rate around 4.5 per cent would raise billions from retail savers

This isn't the first time I have argued for a national housing bond along similar lines, but the political climate is right for it now. Savings rates are spluttering in a bloodbath following the Base Rate reduction to 0.1 per cent. 

And yet stock market volatility is prompting thousands to flock back to cash. 

A national housing bond offered through National Savings & Investments that pays a rate around 4.5 per cent would raise billions from retail savers, let alone what's possible from pension funds, which are scrabbling around in search of low risk, long-term income yielding assets.

Young voters are happy. Pensioners are happy. Savers are happy.

The yield on development lending is one of the few left in the debt markets with room for profit. 

War bonds were issued with 100-year terms. National housing bonds should be five years minimum. Better still 10 or 25 years. 

The government should spend that money on building new housing - and mainly social housing, but good social housing that younger people want to live in. Make it part rent, part government-subsidised. 

You prevent homelessness. Young voters are happy. Pensioners are happy. Savers are happy. 

5. Resurrect National Infrastructure Bonds

These were floated in around 2017 by the previous government on a similar basis to the national housing bond idea. 

Making investment into public infrastructure such as 5G, fibre broadband, roads, bridges, electrifying our railways et al, available to retail savers and investors is surely win-win?

Making investment into public infrastructure such as 5G, fibre broadband, roads, bridges, electrifying our railways et al, available to retail savers and investors is surely win-win?

The government is already printing money willy nilly through the issue of gilts and quantitative easing by the Bank of England. This is only of interest to financial services companies.

But why not redesign it to appeal to ordinary savers and investors?  

Gilts? Boring and difficult to understand for ordinary savers and investors. And how do you buy them anyway? 

Housing bond? A lot more interesting, it's government-backed therefore safe, 'and I feel good about giving back to society while I earn interest'. The same goes for an infrastructure bond. 

While you're at it - make the investment conditions align with reducing the country's carbon emissions to achieve net zero. 

Pulling together and rewarding each other 

War bonds appealed to the country's sense of pulling together, they were symbolic of the social effort it took to win the war. 

We need that spirit to be ingrained into our economy today if we are to grow ourselves back to stability. The money will have to be spent either way: make the returns available to the public and they'll engage with it and support it with private sector money. 

The Treasury has proved this year it can be radical. Now is not the time to row back.  

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