Five lessons from 2010
As 2010 comes to an end, Ed Bowsher looks at five financial lessons we can learn from the events of the last year.
1. Low interest rates make a huge difference to property prices
In the aftermath of an extraordinary financial crisis you might have expected house prices to tumble. Even more so when you remember that it hasn't been this hard to get a mortgage for 25 years!
But the sharp drop hasn’t happened. Instead we’ve seen a gentle dip in 2010. I don’t have data for December but for the eleven months to November 30th, UK house prices only fell 2.4%, according to Halifax.
There’s a simple explanation for what’s happened. The Bank of England has kept its base rate at 0.5% all year. As a result, many homeowners have benefitted from amazingly low monthly mortgage payments. That’s meant they could cope even if they lost their job or had a pay cut, so there haven’t been many forced sales driving down prices.
2. Mergers and new computer systems can be disastrous
Back in the early noughties, the previous government thought it would be a good idea to merge the Inland Revenue and HM Customs. At the same time, a new computer system would be introduced. I can see that the merger made sense on paper. Did we really need two separate bodies to collect our taxes? Surely a merger would lead to greater efficiency and cost savings?
However good the idea looked on paper, it’s not worked out well in practice. Implementing the merger at the same time as introducing a new computer system has been a disaster. Millions of taxpayers have been affected, some over-charged, some not charged enough. Let’s hope future generations of politicians learn from this mistake and introduce change at a slower speed in future.
3. Bonuses on savings accounts are a good thing
At lovemoney.com, we often used to advise readers to steer clear of savings accounts with bonuses. We said this because accounts with bonuses would often start out as a top-paying account but after a year or so could into a clunker.
So if you signed up for an easy access savings account that paid 1% on your savings plus a one-year 2% bonus, your account would only be paying a miserly 1% after twelve months, and you’d have all the hassle of switching your account.
So why do bonuses now make sense?
It’s partly because many more of the top-paying savings accounts now include bonuses. It’s become much harder to find a top-paying account without a bonus these days, so you might as well go with the flow and accept that bonuses make sense.
What’s more, when savings rates are so low, you’ve really got to take every penny you can get from your bank – even if it comes in the form of a bonus. The other advantage is that most bonuses are fixed. This means that if you have a 2% bonus, you know that the return can’t fall below that level for at least a year. That’s a nice guarantee to have when interest rates are so low.
4. Don’t Panic!
By early July, London’s FTSE 100 stock market index had fallen 12% since the beginning of the year. Some pundits thought we might be at the beginning of another prolonged period of share price falls. Yet at the time of writing in mid-December, the Footsie is up 7% since January 1st.
Yes, share prices can be volatile, but the lesson to learn from this is that pays not to panic. Over the long-term – I’m talking ten years or more – share prices normally go up. And they normally go up by more than other assets. So shares are a great place to put some of your savings. As long as you don’t panic.....
5. The Euro was an extremely stupid idea
After what’s happened in 2010, there can be no doubt that the Euro was a dumb idea. Iceland – outside the Euro – has been able to make a modest recovery from its horrendous meltdown in 2008, but Ireland – inside the Euro – is still stuck in the mire.
If Ireland had its own currency, it could let its currency fall and that would boost economic growth. (A cheaper currency helps a country sell its exports.) And if Ireland hadn’t joined the euro in the first place, its problems wouldn’t be so great .
The primary problem with the Euro is that it means you can only have one interest rate across most of Europe. So when Ireland desperately needed a big interest rate rise to curb a massive property boom, interest rates stayed too low. As a result, Irish banks lent too much money based on inflated property values. When the bubble eventually burst, the banks were in a right old mess.
Don’t get me wrong, I’m not saying that the Euro was the only cause of Ireland’s problems. After all, Britain has had its own crisis and we stayed outside the Euro. However, compared to Ireland we don’t have as many empty property developments and our banks’ problems didn’t arise primarily from over-lending on UK property.
In other words, the Euro made things much worse for Ireland than would otherwise have been the case.
So that’s my take on 2010. Check out my blog to find out what I think will happen in 2011.