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sancho panza

The UK borrows at up to 1.37% whilst charging students between 3.3% and 6.3%

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https://notayesmanseconomics.wordpress.com/2019/05/31/the-uk-borrows-at-up-to-1-37-whilst-charging-students-between-3-3-and-6-3/

'The pace of economic news is on the march and for the UK much of it has been in one area this week. We can start with some news that will have Bank of England Governor Mark Carney asking for an extra shot in his morning espresso.

Prices fall 0.2% month-on-month, after
taking account of seasonal factors.

That is from the Nationwide Building Society although junior researchers at the Bank of England might prefer to emphasise at the morning meeting that the unadjusted number rose albeit by a mere £26. This meant this if we look for more perspective.

Annual house price growth remained below 1% for the sixth
month in a row in May, at 0.6%.

If we take that number then I welcome it because with annual wage growth of the order of 3% per annum we are finally seeing house prices become more affordable. In this sense real wages are improving as we remind ourselves one more time that official real wage measures exclude house prices. Can anybody think why?

As ever the average hides more than a few differences or if you prefer standard deviations. In the first quarter prices in London fell by 3.8% whilst everywhere from the Midland up saw increases of 2% or above. Why are London prices falling? Well nobody can afford them.

The main exception is in London, where a period of rapid
house price growth in the three years to 2015 means that
monthly mortgage payments would also be unaffordable for a large proportion of the local population.

I hear this regularly from my younger friends who find themselves scanning the shared appreciation offers as that is all they can afford in the Battersea area.

Looking Ahead

The Nationwide is downbeat on prospects.

Survey data suggests that new buyer enquiries and
consumer confidence have remained subdued in recent
months.
Nevertheless, indicators of housing market activity, such as the number of property transactions and the number of mortgages approved for house purchase, have remained broadly Stable.

However there are other factors at play. I have reported regularly on falling UK Gilt or bond yields and their likely influence on UK mortgage-rates especially fixed ones. This morning has reinforced that trend via lower inflation levels being reported in Saxony Germany and the impact of the new Trump tariff on Mexico. Accordingly the five-year Gilt yield has fallen to 0.64%. Now markets fluctuate but there has been a big move since the 0.95% of the fifth of this month.

Those numbers were too late for this morning’s Bank of England data which maybe showed a pick-up in April.

Net mortgage borrowing by households was strong for the second month in a row, relative to the recent past, in April at £4.3 billion. Over the previous six months it averaged £3.8 billion. The annual growth rate of mortgage lending remains unchanged at 3.3%, the level it has been at since August 2018.

The number of mortgage approvals for house purchase, a leading indicator of mortgage lending, ticked up in April to around 66,300. This was close to the average of the past two years and reversed the fall seen in March. The number of approvals for remortgaging was broadly unchanged, at around 49,400.

That might also have been people waiting on the Brexit which as it turned out was a mirage.

The yield curve

The UK yield curve reinforces my mortgage-rate point as we note that the two-year Gilt yield has dipped below 0.6%. Along the way that presents another problem for the Bank of England morning meeting as Governor Carney’s Forward Guidance is for higher and not lower yields starting with a Bank Rate at 0.75%.

There has been a lot in the press about the significance of shifting yield curve shapes and I would caution on this. Because we have seen so much central bank bond buying via QE they have plainly distorted bond markets. Indeed the “yield curve control” of the Bank of Japan explicitly sets out to do so. Thus old signals are now different.

Let me give you an example of an unintended consequence which raises a wry smile. Bond markets have rallied so much in May that the “yield curve control” is as I type this keeping the benchmark Japanese Government Bond yield up rather than down. Oh well!

But don’t ask me what I think of you
I might not give the answer that you want me to

 

Student Loans

This subject has received some airtime this week but much of the debate has missed the mark. Let me put it simply the UK can borrow at 1.37% for 50 years but we charge students an interest-rate based on the Retail Prices Index presently set at 3.3% and can be up to 3% higher depending on earnings. So up to 6.3%.

Does anybody think that is fair? How about we charge 1% over what it costs us to borrow? Also the hypocrisy of the UK establishment over RPI is unbounded here. I have spent the last 7 years arguing with an establishment desperate to scrap it bur suddenly when it gives a number they like they use it. That is cherry-picking the nicest cherry at the top of the tree.

Even worse as we stand this is pretty much Enron style accountancy as the majority of this will never be repaid.

Unsecured Credit

The Bank of England morning meeting will have found the numbers here problematic too.

The annual growth rate of consumer credit continued slowing, reaching 5.9% in April. It is now five percentage points below its peak in November 2016 and the lowest since June 2014.

The first problem is for my subject of yesterday Sir David ( Dave) Ramsden as a bit over a year ago he called an annual growth rate of 8.3% “weak” so I fear for how he will describe 5.9%. Also Governor Carney’s claim that this has not been a debt fuelled recovery faces an unsecured credit level of £217 billion.

There was no explicit mention of motor credit this month although there is an implied hint from the way the category it is in rose.

Within consumer credit, net borrowing for other loans and advances increased to £0.7 billion, whilst credit card lending fell slightly to £0.2 billion.

Comment

The month of May 2019 has seen quite a bond market rally and thus many borrowing costs will be falling or are about to. There is an irony on the government level where we borrowed large amounts when it was expensive and now borrow very little when it is cheap. Still as @fiscaccountant reminded us there is a passive gain if it persists.

Don’t forget that £99bn of that more expensive debt is being refinanced this year.

Just as some things look grim there is perhaps a little relief and it is reinforced by this from the Bank of England earlier.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £9.1 billion in April , significantly above the recent average.

That is the written equivalent of quite a mouthful but it means UK money supply growth has picked up from the 1.8% of January to 2.8% in April. The way other things look we might need it.

Let me finish with something about the UK student loan system.

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain! ( Cypress Hill)

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We as in the gubbermint don’t charge students anything - the student loan book was sold off. So, it’s worse than this private companies are able to charge students usurious interest rates. It’s criminal. 

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Posted (edited)

Interesting post.. 

Regarding student loans specifically,   the figure bandied around is that on 17% of students ever pay it in full.

The prediction by the ONS is that 40-45% will go completely unpaid.

I guess you could argue that by profiting from the interest they are only offsetting a nominally small value of the total write off.

The far bigger issue in my mind is how much money is being wasted on unnecessary education who's value is only a tiny fraction of its cost.

Edited by Libspero

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3 hours ago, Libspero said:

Interesting post.. 

Regarding student loans specifically,   the figure bandied around is that on 17% of students ever pay it in full.

The prediction by the ONS is that 40-45% will go completely unpaid.

I guess you could argue that by profiting from the interest they are only offsetting a nominally small value of the total write off.

The far bigger issue in my mind is how much money is being wasted on unnecessary education who's value is only a tiny fraction of its cost.

You need to earn close to £52k per annum before you start to repay the capital.

Is is a tax, not a debt.

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16 minutes ago, Wight Flight said:

You need to earn close to £52k per annum before you start to repay the capital.

Is is a tax, not a debt.

A rare tax where the service you get costs twice as much as the tax funding it, with half the value.

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I heard a young girl on the radio saying how good it was that they were pushing the repayment age ceiling up by 10 years but reducing the interest..  so people would pay less xD

One born every minute..

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2 hours ago, Libspero said:

I heard a young girl on the radio saying how good it was that they were pushing the repayment age ceiling up by 10 years but reducing the interest..  so people would pay less xD

One born every minute..

They really shouldn't let Diane on the radio.

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17 hours ago, Libspero said:

I heard a young girl on the radio saying how good it was that they were pushing the repayment age ceiling up by 10 years but reducing the interest..  so people would pay less xD

One born every minute..

Not a Maths grad then ....

As per my ranting in HE wheels thread' there needs to be some feedback for the students not paying the loan.

Any HE body or course that fails to produce 50% of gars earning the median wage x 1.5 needs shutting.

AS it stands I can set up a SPys Dreaming Spires (Scunthrope) put on a load of shit taught degrees, charge 9k, and cash in.

The HE pension schemes esp VC needs linking to the performance of he student loan book.

 

 

 

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Posted (edited)
On 31/05/2019 at 19:04, Wight Flight said:

You need to earn close to £52k per annum before you start to repay the capital.

Is is a tax, not a debt.

As I said on TOS the day they announced it in the budget. It's essentially a 9% graduate tax for the rest of most graduates' working lives. 

I also said that, as it gets written off at 65, and is only payable above a certain income threshold, I expected a lot of boomer housewives (who've never / barely worked in their lives and never went to uni) to end up doing some Mickey Mouse degree in their 60s, with no intention of ever paying back the loan, purely out of boredom / because they can. 

https://www.housepricecrash.co.uk/forum/index.php?/topic/155870-are-the-banks-behind-the-tuition-fees/&tab=comments#comment-2816518

https://www.housepricecrash.co.uk/forum/index.php?/topic/161167-the-total-repayable-cost-of-a-degree-laid-bare/page/3/&tab=comments#comment-2932040

Edited by The Generation Game 🙌

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1 minute ago, The Generation Game 🙌 said:

I also said that, as it gets written off at 65, and is only payable above a certain income threshold, I expected a lot of boomer housewives (who've never / barely worked in their lives and never went to uni) to end up doing some Mickey Mouse degree in their 60s, with no intention of ever paying back the loan, purely out of boredom / because they can.  

Do you get credited with your NI contributions whilst at 'uni', if so another good reason to get re-educated in your 60s.

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Id say borrowing/lending at 1.37% is criminal full stop.

We are where we are with our zombie economy simply because of that. The money printers should be locked up and tried starting with the slimeballs at the BOE.

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Posted (edited)

The interest rates for student loans is intrinsically wrong.

What is interest on a loan for?  It covers two components -- the risk free rate, which is the 'value of money' plus the risk premium, which is the additional amount to cover a risk that the loan won't be paid off (in part or in full).  Now, this approach works perfectly for most borrowers, for countries (bonds), houses (mortgages) and even payday lenders.

This approach to interest works so well that it is 'obvious' -- that is, no-one actually thinks about what interest means.  It is just a thing that you add to a loan. 

But student loans are different.  The 'risk premium' is nonsensical -- borrowers have to pay back by law, it is claimed before money actually hits pocket (paye) and it can't be discharged through bankruptcy.  Sure, some (many) won't pay it all back, but that could be identified at the point of taking out the loan.  And that is the crazy thing -- we deliberately ignore the risk premium that is identifiable at the point of issuing the debt, and load the risk onto all.  Or, perhaps, we deliberately make 'good' students (who'll get a job etc) pay for 'bad' students (who it is clear won't get a well paid job through their degree) just because it is a social policy of government to get as many children as possible to do a degree, no matter how pointless.This is doubly bonkers when you consider that the 'good' people aren't just good for themselves, but also the very ones that the country will benefit from having educated.

To me there can be no justification for adding a risk premium to all graduate loans.  It really has to be separated out.  Students should borrow at the same rate that the government can borrow at -- as the risk premium is actually identical to the country's risk premium (or, rather, that the 'good' borrowers have an identical risk premium, and the 'bad' borrowers are put up with for some reason).  I might think that we shouldn't offer student loans to individuals where there isn't a a decent chance of getting a job to pay back the loan, but that is a nuance -- at the moment 'we agree' that all should have the opportunity for HE.

So, I suggest the following as a solution:

  • A loan taken out to do the degree, with interest* at the same rate as a 25 year gilt.
  • An additional higher education tax, paid for by all, specifically to cover non-performing student loans.

The point would be that the 'tax' part wouldn't be about funding HE, as all the graduates with decent jobs would pay off the loan for their degree -- it would specifically be for the funding of degrees that result in the graduate not earning very much.  ie, the tax would be paid by all solely to cover our politicians' enthusiasm for getting the dimmest fuckwits** into college.  I think that would focus minds a bit.

[* I'd fix it for term at the 25 year rate at the point of taking out the loan, but that's a nuance.]

[** sure, it would also cover people that can't pay off their loans due to disease or injury, or those that suddenly desire to become a monk after their degree.  But mainly it would cover fuckwits.]

Edited by dgul

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On 31/05/2019 at 18:34, Libspero said:

I heard a young girl on the radio saying how good it was that they were pushing the repayment age ceiling up by 10 years but reducing the interest..  so people would pay less xD

One born every minute..

Bright future ahead for that lady 

Labour chancellor of The exchequer 😀😀

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19 hours ago, Malthus said:

Bright future ahead for that lady 

Labour chancellor of The exchequer 😀😀

Yeah...

Nothing like the look on a bright young thing when I put the true cost of a 30y mortgage versus a 20y - 5y overpayment.

'You mean where paying twice the money ...... but the mortgage broker was so helpful ....'

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On ‎09‎/‎06‎/‎2019 at 12:16, The Generation Game 🙌 said:

Not 100% but I'm pretty sure you do. 

You don't, students not credited with NICs for the years they are studying. Years I was at university I only have contributions from my paid employment and none of those years show as full NIC.

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Posted (edited)
9 minutes ago, maudit said:

You don't, students not credited with NICs for the years they are studying. Years I was at university I only have contributions from my paid employment and none of those years show as full NIC.

I was automatically credited with 3 years of full contributions even though I studied abroad... not sure how they've found out?

Edited by BearyBear

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Just now, BearyBear said:

I was automatically credited with 3 years of full contributions even though I studied abroad... not sure how they've found out?

Maybe they changed the rules, when did you study?
I was 2005-2009 and it looks like rules are the same now.

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1 minute ago, maudit said:

Maybe they changed the rules, when did you study?
I was 2005-2009 and it looks like rules are the same now.

1996-2002

Once again, not sure how they've found out...

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