How to survive the credit crunch

You don’t have to read the Financial Times to realise that the current financial climate does not look bright. House prices are falling, it is becoming more difficult to get a mortgage or a loan, and a couple of banks seem to have disappeared down the plughole. finds out how to stay afloat

The economy is sinking fast. Will Heaven finds out how to stay afloat

Economic downturn… falling markets… the lending crisis – these issues might get Gordon Brown excited, but they don’t do much for the rest of us. No, we’d rather turn the page for wars, scandal and famine – unless, of course, someone greedy loses all their money. That can be gratifying.

But you don’t have to read the Financial Times – or study Economics – to realise that the current financial climate does not look bright. House prices are falling (though some say this is a good thing), it is becoming more difficult to get a mortgage or a loan, and a couple of banks seem to have disappeared down the plughole.

Once pinstriped and smug, bankers now sit on trains staring vacantly out of windows, occasionally prodding lifeless Blackberrys. For first-time house-buyers, it’s a struggle. Banks won’t lend to help them buy property, and even though house prices continue to fall, it looks as if they’ll be renting for a good few years to come. Investors in the stock market are in trouble too, as the average UK share price heads downwards for the foreseeable future.

But how does all this affect students? “Not at all”, you might say. “I’m a student and I don’t care. Every term my loan comes in. Every term my rent goes out. The rest I spend on food, travel, clothes and alcohol. I’m not trying to buy a house, and I haven’t invested in the stock market.” You’d almost be right. The truth is, as students, we live in a harbour of economic stability. No matter how rough the financial seas get, our government-backed student loans will not suddenly dry up. The really good news, of course, is that our loans are linked to inflation – so we won’t pay back much more, in real terms, than we borrow.

First though, it’s worth asking yourself if you really understand what’s going on. The credit crunch, most of us sense, is complicated. The New York Times ran an article entitled “Can’t Grasp the Credit Crisis? Join the Club”. Time to call in the experts.

I went to Peter Spencer, a Professor in the Economics department here at York, for some help. Spencer is Chairman of the Institute of Economic Affairs’ Shadow Monetary Policy Committee – an economic think-tank which is said to influence Bank of England policy. How, I asked, would he simplify the credit crunch?
He tells me, slapping fist to palm: “It’s almost as if the economy has done an emergency stop. And there a quite a few people who are going to go through the windscreen.” But, he says, smiling, “you wouldn’t want to exaggerate it.” So he opts for the measured response: “It’s important to think of the background. As a nation, we’ve all been borrowing a lot more money than we should. As a result, the UK banks have had to borrow from international banks in order to supply us with the mortgages and the other debts that we needed.”

But now, Professor Spencer tells me, “what was a mortgage feast has just turned into a mortgage famine. And as one of the world’s biggest borrower nations, we’re really suffering.” I ask him if the problems in UK banking stem from similar ones in the United States: “Yes”, he smiles wryly, “this problem was born in the USA, just like Bruce Springsteen.”

But if economists look to the states as a model for the UK’s short term financial future, the forecast is awful. House prices there have dropped more than 12% in a year, and Bear Stearns, an investment bank which was worth about twice as much as Northern Rock, went under and had to be bought out by fellow bank Morgan Chase for less than the asset worth of its building. Bear Stearns’ share price dropped from $150 to around $5 in less than a year. This incurred a personal loss of up to $883m for their (probably greedy) Chairman, James Cayne.

Put simply, when there is no money to lend, there is no money to borrow. No wonder there is a shortage of first-time buyers in the US – if you can’t show yourself to be a reliable borrower, the chances of a struggling bank lending you 95% of a house’s value are, let’s face it, quite minimal.

According to Spencer, though, there doesn’t have to be a “straight read-across” from the UK to the US. Although, he concedes, “we speak the same language, play golf, watch the same crap on television” it doesn’t mean we have to predict that our house prices will plummet too. The UK is “tarred with the same brush” as the US, but “it is a lot sounder…Our housing market is supported, ultimately, by things like the green belt and housing restrictions.”

So, he concludes, house prices in the UK “will probably fall by about 10 % over time then go sideways for a few years.” So, UK property is not going to plummet. But you, the student, are still asking: “how does this affect me?”

Well, picture yourself as a graduate in ten years time. It’s 2018. You’re 30, and you’ve got a job that you love. But a sizeable portion of your salary is going on rent. Here’s the good news – you might just be able to afford a house. Even better, if the average salary continues its annual rise of around two and half percent, you’ll even have enough left over to go on holiday. The students of today, in other words, are exactly the right age to benefit from the slump in house prices.

Obviously, though, to get high up on the job ladder, you will soon need to gain a firm footing on that ever-so-slippery first rung. In terms of the credit crunch, there’s good and bad news for graduate job-seekers.

Spencer informs me: “If you’re heading towards accountancy, banking – the kind of industries that my students are heading for – then job prospects are just slightly weaker than they were last year. But these are companies with vision and they don’t just slash their graduate recruitment program just because they’ve got a problem with some of their borrowers.”

The upside is that, while “financial engineers” are suffering, the real ones are going to do well. Those currently studying Engineering and Physics have improved job prospects in the next ten years. This is because, quite simply, the manufacturing sectors – including engineering – are expected to do better in the world markets.

Aside from minor changes to the graduate job market plus the ease with which we might be able to buy a house, perhaps students really are safe in our sheltered harbour.

However, £5 per weekly direct debit to a secure savings account, which I think almost all of us can afford, would amount to around £800 by the end of a three year degree. Enough to buy a cheap car, or pay for that first rent cheque in London while you look for a job. If you’re really ambitious, put away £10 a week. That’s £1600 in three years. In fact, most of us are pretty lucky as students – no-one to support, no mortgage or debt payments, and plenty of time on our hands.

If we learn to save money at this age, then we are effectively building a secure financial future for ourselves. Economics: fun, isn’t it?

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