The Impact of Debt on the Housing Market in the UK

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Table of Contents

Personal debts
Homeownership
Rent arrears
Credit Unions
Debt counseling
References

Borrowing is one of the most financially viable ways of raising capital. One cannot afford to lose. People owning homes may be the best witnesses to confirm this. This is triggered by the price value of assets. A dollar’s value today is worth more than the value tomorrow, considering the time value of money. This is different from the value of a house today and its value tomorrow. Through borrowing to build, this theme is proved right, simply because, you build on debt, your debt doesn’t increase, but the value of the building will always keep appreciating. Hence you will always be on the profit side.

Just as a trust’s well-managed borrowing policy can pay dividends so can investors and their managers in the housing market. With the association of investment trusts having reached an agreement on disclosure rules designed to help investors sort out the good from bad, investors are clear on f significant levels of borrowings make a trust risky. Like-wise in the mortgage sector Scottish mortgage, which happens to be one of the large generalist trusts, now has an AAA rating. All these case studies portray how important borrowing is.

Borrowing also helps us to increase the speed of commencing with building fastest than we can by ourselves. The mortgage financing package that is currently hitting the market in the US offers full financing to individuals with a piece of land anywhere with the prime places of different cities. This means that anybody who has land can develop it faster with zero capital. The financial institution takes a certain percentage of the rent for sometimes until the time until the principal amount plus interest is covered.

The housing market in the UK is one of the most booming businesses as far as the finance sector is concerned. According to the Bank of England, UK consumers took out fewer loans credit cards, and mortgages in July this year than they did in June. Statistically, consumers now owe a total of £1.014 trillion, having taken on an extra £10.4 billion of the total by July. (BBC business report, p. 13)

Personal debts

A decline in the amount borrowed indicates a slowing of the market. The news that a major slowdown was on loans secured against homes implies that the money in circulation will increase; this will mean the borrowing rates of housing financing will be affected. For instance, the BOE has raised interest rates five times as from 2005. This has harmed the housing market since people don’t prefer borrowing at high interest rates because the general cost ends up being more expensive than even an alternative of paying rent have you build your own house slowly.

Personal debts have contributed to the growth of quality and cost of housing in the UK, this is an advantage to the economy of the UK because it allows different companies in the housing market to compete for clients which in turn encourages more houses to be built and improved standards of living.

“Both consumers, creditors and mortgage approvals, are leading indicators of the housing market. this supports the market’s view that the UK interest rate cycle is at or near its peak”, (Steve Pearson BBC News, 2007). a positive impact will hence be realized on the housing market since competition by different housing companies will be reduced as banks will have automatically dictated how much “roughly” houses should be going for at market price after deducting Interest charged and adding their operational costs.

A positive impact is evident through the involvement of the bank of England as, whenever there is borrowing by a housing market agent, company, or individual willing to invest in the market, the bank charges a certain interest rate and accounts maintenance fee. This is used by the banking in investing in more diversified portfolios that earn the country better standards of living.

Rising interest rates had also made it more difficult for first-time buyers to get a foot on the property market. Their argument being the mortgage rates have gone high. This has reduced the number of people owning property in the UK. Now that interest rates have gone down, the number of people owning property has gone up. This shifts the demand for other opportunities that had been foregone rise. For instance, Transport Companys are getting to enjoy more of clients purchasing cars and other luxurious commodities that initially had been skipped for customers to buy houses.

House builders’ federation reported an annual fall in the numbers looking at new homes for the third month October. This indicates a drop in demand. On the contrary there is a group that is not benefiting at all from the negative reaction of personal debts statistics. For instance the house builders’ federation. This company’s net cash flow, sales, and profits have been greatly reduced. This negative response to them because operating liquidity is reduced too.

Homeownership

“Statically 78 percent of households are privately owned. The rates at which homes are being owned are amongst the highest in Europe”. (T. Peltinger 2007). This is a great advantage to an economy because the government of Britain spends fewer resources in trying to settle housing cases.

It is further a big advantage to the British citizens since due to large operations of the 78% household, owners can easily form a committee that protects them against any rising claims. It’s an advantage more so because it improves on the way things are run.

Considering that housing is the biggest form of wealth in the UK, homeownership is acting as a store and measure of wealth. This is an advantage to those people owning big property and are willing to sell off due to taxes and bank charges. Big businessmen prefer to buy homes and sell them as a way of doing business as it’s easy to manipulate the tax system.

Taking into consideration the mortgage debt accounts for the largest section of the UK’s debts. These accounts benefit the banks, government, and also the clients since the result is a realized economic growth through government taxation and financial institutions charges.

The rise in the housing market has made many rich. On the other hand, some people still seem to be eyeing their debts performance as they are getting penalized by large repayments. They are off-course a big disadvantage as credit card balances are getting unfriendly too.

Re-mortgaging homes. This is a clean way of raising more capital. It’s an advantage to the owners as they can easily raise more money to pay off debts. The risky part of such transactions comes in case you are unable to raise money to pay off the payments. This doesn’t rule out the fact that interest rates will certainly be unpredictable.

Part re-mortgaging your home to raise instant capital; this can be an added advantage of homeownership though on the other hand, it will also depend on the value of your premises. Again the question of whether interest rates go down or not.

Downgrading. This is where one takes a profit on their home, paying off their debts and then grading it lower to a cheap house. This is a happing scenario and an advantage to people who are in great debt.

Releasing some or all of equity from one home. This is similar to interest rates. This is where you may be paying 90% for a mortgage probably you may be charged like 15% of your credit card debt. In such cases, one has the advantage of swapping one debt for another, but at a substantially lower rate.

The impact of debt on homeownership has also encouraged housing schemes and discouraged the UK property market. This is because the average UK house now costs £200,000 (BBC News). An amount that very few comers in the market can easily raise without financial support.

House afford measures are other factors that affect debts and ownership of houses. The price to income ratio for instance is the basic affordability measure for housing in a particular place and lending decisions. This introduces the fact that not all places are worth the same value of cash.

The deposit to income ratio is another factor affecting the affects ownership of homes in the UK. This means the much that an individual can pay as a down payment before planning to shift to a newly bought home. If the deposit to income ratio is high individuals will have to be financed by societies or mortgage financers to afford it. It’s an advantage because it allows people to own property before they pay for one.

The affordability index measures the ratio per monthly payment about the actual amount. It’s used in the UK where all mortgages have been attached to banks lending rates. It’s an advantage to people wishing to own homes.

Rent arrears

The number of tenants in arrears has increased by a small percentage. A higher percentage of people in arrears in the social sector may be expected due to private landlords preferring to let to those with earned incomes. This again is acting as a disadvantage to the newcomers in the industry since it’s not possible to have arrears if you have never owned property.

Due to different factors, it seems very few tenants from the social sector are in arrears with their rent. This is different from the private sector. It happens due to government incentives that come along with unemployment or else referred to economically inactive.

Rent arrears prospect or rather a mortgage arrear or default was reduced by falling real repayments and arising real values. There are a couple of advantages and disadvantages, panting out how the rent arrears affect debts in the housing market. First and foremost the provision of sub rental opportunities. Where a consumer sub rents to a third party and continues rearing extra liquidity as he pays the monthly installments.

There is a decline of people who are in arrears with their rent. This is an added advantage to those people who are planning to buy-to-let the surprising feature is the number of low-income earners and the unemployment rate within the social sector and in arrears with their rent. This is an added advantage to landlords who advertise “DDS not accepted”. They can opt to rent their premises to different tenants and enjoy the benefits of monthly installments other than having empty premises.

Arrears on the other hand can be disadvantageous especially when not met on time by tenants. This is because courts in the UK provide for unsettled arrears as part of protecting landlord’s rights. In cases where the tenant has been summoned to court, he will have to pay court costs. You leave your home if ordered to by the court, you have to pay the debt even if you leave your home, you may be considered intentionally homeless and as such will not be re-housed by any council or housing association. Arrears traditionally have been handled by in the house and outsourcers. From an economic perspective, these methods have worked well in the housing market, but something strange happens especially when customers don’t respond. According to business ethics and law, no debts can be passed over to a debt recovery agency, thus this becomes a disadvantage as it’s hard to calculate the chances of recovering that money.

Credit Unions

In the UK the credit unions have caused their leading rates with the decrease in the rate of housing market growth. This is an added advantage to the entrepreneurs willing to build more buildings. This is because the economy is expected to have an economic turnover. That will mean they obtained credits when the bank rates had gone down and rented them off when the market has picked and at a higher price per month.

Mortgage financing is where some associations are willing to finance 100% to individuals who own land in prime areas in the country. As a result, these individuals can be able to raise a building of their own for rental or personal purposes. The controversy comes in when the financing firms lead money to clients when the interest rates are low. This can be followed by the poor performance of the housing market generally. Like what is happening currently in the UK. The agencies will be forced to hike up their prices to tenants to cover the cost of interest rates. Inflation on the other hand can also affect the way landlords issue their houses to tenants especially if they were given money when the currency was hyper-inflated.

A housing association is also responsible for regulating different homes across England. This means the entire committee has teamed up to form one organization. Giving the association the monopoly to fix prices of houses in the UK at a rate that they think is market-friendly and considers the way forward in managing their client base. For instance, the housing association in the UK can manage the rate of payment and debt arrears. On the other hand, customers too are advantaged because the association governing them is under the government cooperation hence no exploitation. Not forgetting that the government can intervene in cases where one of the parties is oppressed.

Housing associations loan financing. This is a scheme where different individuals can apply to the financing association for funding to support the building of homes. This is an advantage to the firms because they earn a certain percentage of profits in cases where the customers build rental houses. On the contrary, the customers face a hard time especially when the market for their houses delays in attracting clients. This is because they will still have to meet the monthly payments.

The corporation offers to assist associations that require any help be it financial. Currently, the cooperation announced a unique opportunity for associations to make it known what kind/type of support and guidance they use and would like. This will be to help both the corporation and other bodies to provide that support. This is of great advantage to the association as they can access financial help and professional advice. Diana kingdom, chief executive of green oak housing Association was quoted expressing her gratitude and joy of being part of the sounding board overseeing the project.

Currently, the housing corporation is working in conjunction with English partnerships and communities and local government to establish a homes and communities agency to the office for tenants and landlords. This is of great advantage to both parties as they can easily handle any misunderstanding with ease. They are financial cooperatives owned and controlled by their members. They offer cheap loans and constantly try to impose a serving culture on their clients. The union’s interest payments are tailored in a way that one will pay less and less interest. This is an added advantage to the housing market since they can borrow big sums than they would have in banks and pay less interest than bank rates too.

Absence of hidden charges. In many financial institutions in the UK Hidden charges exceed the visible charges in terms of transaction costs, account maintenance fee, legal documents fee among other minor fees. The absence of such fees in an investor’s mind helps him calculate the exact debts that he owes the institution and projects the amount payable upon maturity, hence providing insight on the projected balance sheet.

Unsecured loans. Some unions will even offer unsecured loans. This is one of the friendliest customized packages that credit unions offer. To a large extent however it’s not so financially viable to acquire debt or rather a loan from a credit union simply because nonsecured loans tend to attract higher interest rates than normal. Though there is this defeat, its superiority cannot be ignored either as it can assist individuals with no capital at all to start from nowhere.

Foreign currency mortgages. The majority of borrowers raise the mortgage they need to buy their homes in pound and pay in UK’s current interest rather hence its possible to borrow the money you need in Euros, & dollars, Swiss francs or yen. Secure the debt against your house in the UK and pay a much lower rate of interest. mortgages and loans.

Islamic finance avoids interest. The UK population of Islam has to be taken care of. Credit unions have introduced Yara with diminishing Musharaka the mortgage alternative, this is where the bank buys a house permanently, then legally it becomes the owner, then a certain percentage is paid monthly plus an extra fee for purchasing the premises. This contract is for say, 20 yrs. It’s of great advantage since it provides a gateway for Muslims to own mortgages too. Housing benefit changes implemented restricts the level of housing benefit payable to private creditors; entered payments are all in arrears. This system allows potential tenants to find out how much housing benefit would be payable on a specific asset. The potential to find out how much housing benefit is payable is an advantage to potential house owners and already existing owners since it gives an insight into projected earnings.

The UK housing benefit has been paid wholly in arrears. Up until then, it’s been made partly in arrears and partly in advance. This change was purposed to tackle the problem of payments, initially, landlords or tenants were required to pay back benefits for a while, something they were not supposed t either because the circumstances had changed or tenancy had ended. Hence, different schemes agreed and it logical landlords were not and should not let houses to claimants of housing benefits of rent arrears. This brings in another disadvantage in the rental property market. This is because the whole business idea of profit maximization is shifted to charity work where profits are not considered as a central motive of the business.

Landlords are also disadvantaged on the issue of rent, especially where tenants are young people. This particular group will ask for pre-tenancy determination, and in most cases will want to pay lower rent rates, they accumulate arrears and are unable to pay deposits. The payment of rent in arrears will be a disadvantage to landlords in the housing market because their liquidity is interfered with and hence an expansion plan is not easy to set up, bills payable to different agencies will be delayed and business will generally move the show.

Rent arrears on the contrary are an advantage to landlords willing to expand in the housing market. This is practical in cases where landlords give specific deadline dates to their clients on the last date of holding rent. This amount if paid in fun on the actual date gives associations enough liquidity at ago and this money is not taxed by banks meaning one can approximate exactly when they are intending to plan and start up a new development strategy.

Arrears also help landlords to develop a perfect relationship with their clients. Arrears at times form a strong bond because there is always a financial Relationship between tenant and landlord.

Human rights movements can at times act as a disadvantage to landlords. The UN for instance will encourage victims of a particular crisis to the house on rental arrears arrangements until such a time when they can pay their debts. For example, houses that were destroyed by Katrina. The human rights movements were trying to negotiate a deal with housing corporations to house the affected for some time as the government thinks of a way to re-finance them partially and at least help from getting back to their feet.

Rental arrears can at times be advantageous or disadvantageous especially when you consider economic conditions like inflation and change in exchange rates. For instance, rent paid in the fun when an economy is affected by hyperinflation will be valueless compared to rent paid when an economy relatively free from inflation. Landlords holding money at such times will either face a heavy spending rate or benefit if at all the value of the dollar at such times is more valuable. Other factors like exchange rates will affect the international housing market. For instance, Robert Kiyosaki’s foundation and real estate investors built highly valued houses in South Africa, by the year 2001, the south African dollar feu greatly relative to the US dollar at that time. The company was forced to hold getting payments from its tenants until a time when the dollar was stable; the tenants were willing to pay the money, but it would mean after converting the money to US dollars the cost of the building was not a viable business.

Debt counseling

Debt counseling can revive borrowers who find themselves in financial crisis; especially with increasing unemployment, constant warnings by banks against personal financial over-commitment. Banks ought to be extra careful before getting involved in debt counseling.

The council of mortgage lenders has for the first time also reported an increase in repossession orders. Hence it’s important to draw a line between the two risks involved, and they evaluate which one is more viable for the two parties. Of course, there advantages from clients view and disadvantages too. On the other hand, there are the same from an institution’s perspective.

Face-to-face counseling has been proven as the best practice in the mortgage sector. Here business can be direct or through intermediaries. But increasingly unsecured lenders are turning to this format too.

Many of the clients out there and businessmen have realized the issue of debt counseling and arrears cannot just be addressed electronically. Thus the majority of housing market agencies have resulted to going out of their way to talk out to their clients or parties and come to a common consensus.

This is a revised way of debt arrears collection as it involves a modified traditional way of debt collection.

References

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Bill Edgar, Doherty (2002) Access to housing: homelessness and vulnerability in Europe.

Michael Carr (1997) New Patterns; process and change in human Geography.

Loimans A.C Peter Williams (1995) Directions in housing policy towards sustainable Housing policies for the UK.

Pamela Redhead (2007) Housing Market- Spreading the Risk, Royal Institution of Chartered Surveyors.

Richard green (2005) Mortgage Research Good news for house buyers.

Nixon C. (1998), Discourse and housing debt –trends in the UK housing system Publisher Elsevier.

Mark P. David J The psychological Costs of unsustainable housing commitments. Pevalin Jennifer Todd. (1998) Cambridge University Press.

Dan rider (1917) Rent Raising made illegal: a practical guide for tenants.

Repeal the rent act. (1957) How to resist and defeat the Tory party landlords.

Heather cannon (2004) why borrowing isn’t always a bad thing? The observer. Web.

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