End of Pensioner "Perks"

[slowster]

As Al says the cheap mortgage rates are on the backs of the older investor, sod all return!

Understanding exactly why that is, and who really benefits from it, is probably a good start to understanding many of the problems society faces today, both old and young.

Savings rates are abysmal because of the creation of massive amounts of money by quantative easing. Supposedly that was done in the best interests of society as a whole. The whole financial system was in danger of collapsing, with banks unwilling to lend to each other because they feared that other banks were in danger of going under due to the extent of their hidden bad debts. In reality, they pretty much all had enough bad debt on their books that their own actions in refusing to lend to each would have resulted in the very thing they feared: an economic crash and massive fall in the price of houses (on which a lot of that debt was secured). That would have crystalised those bad debts on the banks' books and triggered their failure.

So all that financial chicanery kept house prices high, but who really benefitted from that? A lot of homeowners might feel relieved that the value of their house did not fall by 50% or more, but for the most part it would not have made any difference to them if it had. They would still have carried on living in the home, and if they had to sell to move somewhere else, the value of the house they wanted to buy would similarly have fallen. Those who had borrowed excessively to have bought a house would have been in negative equity, but that has happened in previous recessions and eventually that negative equity disappeared as people slowly paid off their mortagages and house prices gradually rose again, or in extreme cases they went bankrupt and were able to start again with a clean slate after a few years. Those who were relying on the value of their house to fund care in old age would have lost out, but we probably need to stop seeing housing as an 'investment vehicle' to fund end of life care.

The real beneficiaries were the banks and wealthy investors. The shortgage of housing in the UK and the superficial financial advantages of people buying their home as an investment (rather than a place to live), e.g. no capital gains tax, resulted in banks and other wealthy institutions pumping vast amounts of money into the mortgage market, in order to take advantage of people's desire to own their own home. Unsurprisingly, all that money simply served to increase house prices because there was so much extra money available to borrow in order to buy a house or buy houses to let.

With no quantative easing those banks and wealthy investors (many of whom probably borrowed to fund their investments) would have been wiped out. Ordinary workers and savers would probably have been the winners: the value of what their wages would purchase would have increased, and the interest on their savings would be a lot higher.

[kwackers]

With no quantative easing those banks and wealthy investors (many of whom probably borrowed to fund their investments) would have been wiped out. Ordinary workers and savers would probably have been the winners: the value of what their wages would purchase would have increased, and the interest on their savings would be a lot higher.

Sounds simply when you put it like that.

But what's the real cost of a run on the banks?
When fluidity of money movement stops overnight, when you can't get access to your savings or even your wages, when you probably don't even have a bank to put wages into, when the company you work for suddenly loses all the money they had put aside to pay your wages and collapses.
Where does the money come from to jump start the economy? Who pays for that?

The idea that the modern world would survive a run on the banks is imo a fallacy.

[al_yrpal]

Very interesting Slowster but it actually started apace in 1999 long before any QE took place. In that year the clued up wealthy switched from saving in banks and building societies to property well ahead of the crowd. Soon after that Joe Public cottoned on and the banksters started lending for Buy to Let and property speculation. The housing shortage created by budding landlords population growth (not allowed to blame immigration) and speculation started to ramp up prices and the banksters were offering 100% loans to the string vest brigade. In 2008 it all collapsed and QE was brought in to prop up the overlent insolvent banks sitting on devalued assets that hadnt failed.
Whatever, as I said low interest returns drove it.
Why the obsession with property? These days there are all sorts of disincentives to Landlording, extra stamp duty, taxes, regulations, CGT, dodgy tennants, and a house is not a liquid assett, you can wait for a year to realise your capital on selling. Compare it with equities and equities are a no brainer with decent returns and a low level of taxation. I think folk think investing in Shares is gambling, its not if you do your research properly and you can usually get your money back in 3 days.
If they bring in laws to give tenants greater security there will be a stampede to get out of Landlording and values will plummet. No bad thing... Youngsters will benefit.

Al

[slowster]

Sounds simply when you put it like that.

But what's the real cost of a run on the banks?
When fluidity of money movement stops overnight, when you can't get access to your savings or even your wages, when you probably don't even have a bank to put wages into, when the company you work for suddenly loses all the money they had put aside to pay your wages and collapses.
Where does the money come from to jump start the economy? Who pays for that?

The idea that the modern world would survive a run on the banks is imo a fallacy.

I'm sure it would be far more complex than I have outlined, but probably not much more complex than QE and everything else that was done.

I think the answer to the problem of banks going bust and the resulting freezing of the financial system was that the moment the banks advised that they were bust/were switching off their ATMs etc., they should have simply been taken into public ownership (before being sold off eventually like RBS), in a similar way that the UK Govt. used emergency powers to stop the Icelandic bank Landisbanki from removing assets from the UK. That may sound extreme, but the banks serve an essential utility function in the economy. If a bank stops fulfilling that function because it has run out of money*, then I think the wider interests of the UK economy should justify the bank passing smoothly into public ownership, rather than simply allowing the bank to undergo a disorderly insolvency with the resulting damage to the financial system and wider economy.

(*I appreciate it's more complex than that, because the banks were entitled to seek money from the Bank of England in its role of lender of last resort, but I think that the banks at the time had so much hidden bad debt that it was not simply a case of needing short term BoE borrowing, i.e. they were dead/zombie banks.)

In both cases the bank's shareholders would be wiped out, but I am unconvinced by the oft repeated argument that that means that ordinary people suffer because their pension funds are invested in bank shares. The PLC model is broken, especially for banks. Investment managers fail to exercise proper control and oversight over the boards of the banks in which they invest, and evidently failed to fulfil their most basic role - to understand the nature of what they were investing in and the risks involved. Instead the banks were allowed to run themselves as they saw fit, often more to the benefit of their senior executives than their shareholders (Barclays being one of the worst examples, as the current prosecutions indicate).

If banks' shareholders had lost their investment, it would have triggered a long needed kick up the backside for investors, especially professional investors and fund managers, to do more to earn their money and properly understand and oversee what the companies they own are doing.

[al_yrpal]

Bank shareholders did loose heavily. The value of their shares plumetted and never recovered. We are talking about 95% in some cases.

Lesson learned...

Al

[slowster]

Very interesting Slowster but it actually started apace in 1999 long before any QE took place...

I don't disagree with much of of what you say, but I think that the biggest factor was probably the dotcom bubble which burst in 2000. By that point, we were probably due a recession, and the dotcom bubble should have heralded/triggered it.

Instead central bankers around the world responded by significantly lowering interest rates. That greatly reduced the impact of the bubble bursting and prevented a recession, something for which central bankers patted themselves on the backs.

Those low interest rates encouraged banks to lend, and institutions and wealthy investors to borrow in order similarly to lend. And since tech shares were no longer a good investment, most of them invested in the mortgage sector and housing because that was seen as the best/safest investment.

You will note that there was not much balance in their approach, instead they pretty much just copied one another, constantly seeking the highest return and the next big thing. The idea of investing for the long term, spreading the risk over a wide range of sectors, and focusing on investment fundamentals (proper underlying value of the asset and it's ability to generate an income) just did not apply.

And we all now know the reality of those investment decisions: billions in loans to people who would never be able to repay them, and then slicing and dicing those loan books in order to repackage them as AAA debt (a rating the credit rating agencies gave because they too did not do their basic job of understanding the risks and their business model was - and still is - built on a conflict of interest: they were paid by the debt sellers, not by the debt buyers). The repackaged debt was sold around the world, infecting the whole system, and the money from the sale of the repackaged debt was lent out in more mortgages.

When he retired, Eddy George, the former governor of the BoE, stated that central banks had created a problem by the amount of cheap money created to avert a recession after the dotcom bubble, and he said that was something his successor, Mervyn King, and the other central banks would have to address. They didn't. Instead Mervyn King made a lot of noise about 'moral hazard', only to prove to be the biggest moral hazard in the system when he supported and agreed to policies after the crash that bailed out the feckless and penalised the prudent, i.e. nationalised losses and privatised profits, resulting in e.g. low interest rates for savers.

[pete75]

As Al says the cheap mortgage rates are on the backs of the older investor, sod all return!

Yep but the vastly increased house prices being funded by those cheap mortgages disproportionately benefit older people so it balances out. In any cases there are ways to invest where the return isn't linked to interest rates - property for example.
In any case interest rates are not so bad now - true interest rates are the difference between interest and inflation. Average savings rate in 2016 was about 1.3% and in 1980 was 10.5%. Inflation in 2016 1.8% and in 1980 18%. 2016 true interest rate -0.5% 1980 true rate -7.5%.

[djnotts]

Interest declared - me, old. Bus pass saves me up to 20 quid a week. As far as I can tell, cost falls to D Trans PES line (budget), but that surely over simplifies the benefits - health in particular - ability to get timely medical care, reduction in loneliness - environmental - no car - social - helps maintain city centres. In a sense already means tested - the wealthy use cars!

Heating bonus could surely be taxed? Fair IMO.

Under-utilised houses a valid but difficult point. Since the kids left (tho' 1 tends to boomerang) and my wife died I would be only too happy to get somewhere smaller and free this up for a family, BUT the time, effort and expense in so doing is proving daunting. Moving house is considered stressful at any age - widowed and over 70 it's both mentally and physically crushing. Plus it simply reduces what I can leave - 5 grand wasted compared with what I'll leave in say 2 years time if I simply stay put. Answer simple - state should own all housing and allocate to need (property IS theft). But I don't see that happening any time soon...

[thirdcrank]

... I think that the biggest factor was probably the dotcom bubble ...

I think that in this country it goes back even further. Occupational pensions which were once common in large companies used to be conservatively funded with long-term government bonds known as gilts. Nothing exciting but everything more or less guaranteed. Then somebody (George Ross-Goobey?) had the bright idea of funding pensions with shares and had impressive results with one pension fund. IMO somebody should have posed my dear old dad's question "What will happen if everybody does it?" When everybody did do it, the inevitable effect was to push share prices higher because loads more shares were being bought. It also pushed fund managers into dafter investments in the pursuit of returns: dotcom simply replaced tulip bulbs etc. Some companies are said to have used their company pension funds as a piggy bank and Gordo thought it would be a wheeze to syphon off some £££. All sorts of other jiggery-pokery has left some depending on the pensions lifeboat or even less. It's been all too easy for companies to split off their pension liabilities into a separate company and then sell off the rest. The rules have been tightened up too late and are enforced by toothless watch doggies.

[Ben@Forest]

Moving house is considered stressful at any age - widowed and over 70 it's both mentally and physically crushing. Plus it simply reduces what I can leave - 5 grand wasted compared with what I'll leave in say 2 years time if I simply stay put.

I wonder if the baby boomer generation is the last which has stayed relatively sedentary in terms of housing and is therefore much more attached to those dwellings.

Once he left home, upon marriage, my father has only lived in two houses since. Since adulthood l have lived in seven different dwellings, all in different towns/locations, and one of those was abroad. My wife, who is less travelled, has lived in five.

I have no problem with moving and we are planning to move to more appropriate, accessible housing when we age, we definitely don't want to be car dependent when elderly. My only issue with the type of retirement/sheltered housing l have seen a couple of relatives in is a garage for bikes!

[pwa]

I'm still a good few years away from retirement, but the kids are now at the point where they only live with us occasionally and I can see a point where, in a couple of years, they will be only occasional visitors and our four bedroom home may seem too big most of the time. But we live in a small village and alternative houses within the village don't come onto the market very often. I'm not sure downsizing would be possible without leaving the village, and we wouldn't want to do that. This is home.

[djnotts]

Moving house is considered stressful at any age - widowed and over 70 it's both mentally and physically crushing. Plus it simply reduces what I can leave - 5 grand wasted compared with what I'll leave in say 2 years time if I simply stay put.

I wonder if the baby boomer generation is the last which has stayed relatively sedentary in terms of housing and is therefore much more attached to those dwellings.

Once he left home, upon marriage, my father has only lived in two houses since. Since adulthood l have lived in seven different dwellings, all in different towns/locations, and one of those was abroad. My wife, who is less travelled, has lived in five.

I have no problem with moving and we are planning to move to more appropriate, accessible housing when we age, we definitely don't want to be car dependent when elderly. My only issue with the type of retirement/sheltered housing l have seen a couple of relatives in is a garage for bikes!

Well, not counting all the bedsits etc when a student, I've lived in 6 or 7 as an adult, in Leeds, Plymouth, Amersham, Nottingham, Northampton and back to Nottingham. The difficulty in moving is not so much sentiment/attachment as simple "effort" - selling, finding and buying a replacement, the sheer physical side of clearing nearly 50 years of accumulated "stuff" and preparing remainder for transportation. Nor do I any longer have the physical ability to do any DIY in a new property. And you are right about bike storage - otherwise I'd favour a flat!

[reohn2]

Moving house is considered stressful at any age - widowed and over 70 it's both mentally and physically crushing. Plus it simply reduces what I can leave - 5 grand wasted compared with what I'll leave in say 2 years time if I simply stay put.

I wonder if the baby boomer generation is the last which has stayed relatively sedentary in terms of housing and is therefore much more attached to those dwellings.

Once he left home, upon marriage, my father has only lived in two houses since. Since adulthood l have lived in seven different dwellings, all in different towns/locations, and one of those was abroad. My wife, who is less travelled, has lived in five.

I have no problem with moving and we are planning to move to more appropriate, accessible housing when we age, we definitely don't want to be car dependent when elderly. My only issue with the type of retirement/sheltered housing l have seen a couple of relatives in is a garage for bikes!

That's probably because the previous generation to yours had a more settle working life,obviously that's a generalisation but I think it's a valid one.
The longer you live somewhere the more attached you become to the house,neighbours and surroundings,especially if you have children that have grown up there.

[pwa]

This all relates to what we mean by the word "community". My village is my primary community. If I had to downsize I might be forced to leave my community, the place where I have slowly been building ties for twenty odd years. For me that would be a disaster. I would feel bereft. I have heard that some old people go down hill rapidly when they are uprooted and I can believe it.

[al_yrpal]

Well, in two weeks, at 76, I shall be flying in the face of all this. Moving from our home of 40 years to buy and share a new (very old) big house with our daughter and her husband more than 100 miles away. We dont want to move and leave this lovely place and all our local friends but my wifes illnesses make it the only sensible thing to do. Since early March I have been rationalising our possessions, taking some things to Sue Ryder, others to the dump, a massive task on my own without my wifes assistance but doable if tackled bit by bit day by day. I see the move as a challenge and an interesting new opportunity. Our close friends here will remain old friends there and I am sure there will be lots of new friends too. My big regret will be to leave the quiet lanes, downs, bridleways, beechwoods and footpaths of South Oxfordshire. It has been cyclists heaven here and I dont believe Mid Devon will be as nice but then theres nearby seaside places to enjoy. My son in laws parents are buying an attached cottage so we will be a little community to look after each other and enjoy each others company. My daughter will get a free TV licence and we will share their Netflix and broadband!
I guess the daunting prospect of the move is still to come and my daughter has a work schedule for me lasting to about 2030! Guess it will help keep me fit active and young at heart.

Al