Hard times ahead as UK readies to ride out the eurozone storm
Few households have escaped the far-reaching implications of the eurozone crisis – and the worst could be yet to come as events in Europe continue to unfold.
Any lingering doubts that the latest escalation in the crisis could damage the UK economy were seemingly dispelled by the IMF this week. It warned that the UK could face a “substantial contractionary shock”, adding that the “risks are large and tilted clearly to the downside”. Whatever happens in the eurozone over the coming weeks and months, few people will escape the fall-out as the uncertainty hits on our personal finances.
Consultants Capital Economics this week said the crisis had contributed to an estimated £470 billion drop in the total value of household assets over the last year – effectively leaving the average UK household some £18,000 worse off. So, we look at some of the potential implications for you and your money.
Whether you’re looking to buy, sell or remortgage, developments in the eurozone may well have an influence on what you do and how you fare.
Bob Pannell, chief economist at the Council of Mortgage Lenders (CML), said: “The underlying picture is likely to be one of easing momentum in the housing market, but with potential for a sharper downwards correction on bad eurozone news.”
The rising cost of wholesale bank borrowing in recent weeks has driven up mortgage repayment rates, posing a dilemma for those mortgage payers who have benefited from low standard variable rates (SVRs) over the past three years.
Mark Dyason, director of broker Edinburgh Mortgage Advice, said: “If you’re looking at remortgaging, the base rate is unlikely to move significantly in the next couple of years, so depending on your lender’s SVR you may be best staying put.
“But if you need a new rate then review it sooner rather than later to remove the risk of the cost of mortgages becoming further detached from the base rate.”
He also warned that lending to first-time buyers may be curtailed once more, with banks forced to hold more capital to balance the increased risk of lending to those with small deposits.
“So the Eurozone crisis means fewer first-time buyers, which means no chain-starters and that means a moribund market,” said Dyason.
For sellers that means being prepared to lower their asking prices, resulting in average house prices falling.
“So the overall impact on people thinking about the market and moving house is that it may prove difficult to find a buyer and that might affect your thinking when you have an offer, but remember what affects your selling is also a factor in your purchase,” said Dyason.
After remaining relatively buoyant amid the economic uncertainty of recent months the markets now have a case of the jitters – sending some investors into safe havens while giving others a sniff of a good buying opportunity.
The FTSE fell to a five-month low last week, recovering only gingerly earlier this week as the G8 moved to calm fears over the prospect of a Greek exit from the euro.
But Haig Bathgate, chief investment officer at Turcan Connell in Edinburgh, urged long-term investors – such as pension savers – not to panic.
“There are some key areas that would be adversely impacted by a Greek exit from the eurozone such as banks but in many cases the share prices reflect that potential outcome,” he said.
“Other shares that have sold off will barely be impacted by a Greek exit so if you can cope with the volatility, and you are a long-term investor, this kind of market presents an opportunity.”
Even if markets fall in the short-term there is still ample long-term value, said Bathgate.
“Companies generally currently hold a lot of cash and are very profitable and look attractive.”
However, he advises steering clear of UK gilts due to the impact of the QE gilt-buying programme.
“If, as we expect, that creates inflation investors could lose a lot of money in what are deemed to be low-risk investments even if the government meet all of the interest and capital payments,” said Bathgate.
The Bank of England is even less likely to raise interest rates following the fall in gilt yields, so even as inflation eases off savers will continue struggle to secure returns keeping pace with inflation.
Demand for the income no longer paid by normal cash accounts has seen savers flock to alternatives considered relatively low-risk as the surge of interest in the recent retail corporate bond issue from Tesco Bank showed. Yet there are some decent savings deals on the market, according to Kevin Mountford, head of banking at Moneysupermarket.com
“Changing regulation and the ongoing euro crisis mean bank demand for retail savings will be greater than ever,” he said.
Pension savers have been hit harder than most by the crisis and its repercussions, not least the Bank of England’s attempt to boost the UK economy through quantitative easing (QE).
The problem is that the bank uses the money produced by QE to buy gilts, driving their price up and their yield down. As gilts are also used as the basis for annuity rates, providers have slashed the income they pay on those annuities.
Annuity rates have fallen by more than 25 per cent over the past four years, costing millions of retirees invaluable pension income – and they could fall further if events in the eurozone lead to a fresh round of QE.
Lower gilt yields also affect people who have entered drawdown instead of buying an annuity. Drawdown allows a certain level of income to be taken from the pension fund while leaving the remainder invested.
However, the maximum amount of income that can be taken has been slashed by as much as 55 per cent, according to MGM Advantage, due to lower gilt yields, lower investment returns and rules introduced last year restricting the proportion of the fund that can be drawn down.
Andrew Tully, pensions technical director at MGM Advantage, said because drawdown gilt yields peaked in July 2007, retirees whose five-year reviews are due this summer will be worst hit.
“Gilt yields are at historic lows, hitting 2.5 per cent in May, due to the financial crisis and the impacts of quantitative easing,” he said. “They are likely to remain low until there is a resolution to the eurozone issue.”
He said those affected should either accept the reduction, in the hope that income will be boosted by improved investment returns, top up their drawdown contract with other savings; gradually withdraw from drawdown into annuities, or consider an investment-linked annuity.
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Wednesday 19 June 2013
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