nortons recovery
Lies, Damned Lies and Statistics
August 2007 has seen the latest insolvency statistics published by the Insolvency Service. They show company insolvencies for the second quarter of 2007 marginally down on previous quarters and personal insolvencies also showing a fall against the first quarter of 2007.
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Overall the figures are still very high and an increase on the same period in 2006, but is this an indication that individuals with personal debt problems has reached a plateau?
Statistics are all very well, but it is important to look behind them. Take the company insolvency figures for example. The number of liquidations has remained stable for some time, but the figures ignore company Administrations. These have increased dramatically following the introduction of the new Administration procedure in 2003. The entry into Administration is now much simpler in most cases which has opened the procedure to many more companies.
Whilst some companies which enter Administration will exit by going into liquidation and will therefore feature in the Dti statistics, many move straight from Administration to dissolution. These do not appear in the figures. The actual number of company insolvencies is almost certainly much higher than the figures indicate.
The personal insolvency statistics are equally difficult to interpret. There is evidence that the banks and finance companies are hardening their attitude to IVAs and are rejecting more than before. For example one of the major banks now insists upon a minimum return of 40% before they will consider supporting an IVA. It is quite possible therefore that whilst the number of IVAs approved has levelled off, the number of people making proposals has continued to rise. There is no reliable way of measuring this as only approved IVAs are registered.
What is apparent is that more and more individuals are under financial pressure. The number of property repossessions, whilst still low historically, is rising. Many people are only now feeling the effects of the recent rises in interest rates as their fixed rate mortgages come to an end. Consumers who are already burdened with mortgage and credit card debts may find the sudden increase in their repayments too much and the numbers defaulting on loans could rise further.
What impact may this have on the property market? Many commentators have been saying for some while that property values are too high when compared with average incomes and that if the market follows the pattern of the last 30 years or so then a correction to values is overdue. Recent statistics show that the rise in property prices nationally has slowed to a crawl and this almost certainly means that in some areas prices are actually falling.
We have seen in the past how a lack of confidence in the property market can have a serious impact on the economy with consumer spending falling. The Spring bulletin of the Ernst & Young ITEM club commented that the consumer and the government are overborrowed and can no longer drive the economy forward. The bulletin went on to say, "We are living beyond our means and are exposed to a reversal in financial market confidence."
There has been much publicity about the restriction in funds for leveraged buyouts and worries about the US economy fuelled by the crash in the sub prime mortgage market. It seems that these problems could easily create problems for at least some sections of the UK economy at a time when we are in a very delicate phase.
So whilst the statistics indicate that problems, particularly with consumer debt, may have reached a plateau, this could be very misleading. Many are worried about the immediate future for the UK economy and there are signs that we could be in for a bumpy ride!
©2008 Nortons Recovery Ltd