First, house prices are still completely out of proportion with earnings. It has been established over the years that a mortgage of three times salary with a 25 per cent deposit is a pretty sensible arrangement but if average earnings are around £25,000, then this would translate into a mortgage of £75,000. Even assuming a deposit of £25,000 can be scraped together (tough in this climate), then that would allow someone earning the average wage to buy a house for only £100,000, yet the average house price is still north of £150,000.
Obviously, a working couple could afford more but it still seems to me that buying a house is still realistically beyond the means of the average citizen.
I do not see any evidence that houses are in short supply, either. If that was the case, then surely rents would be rising but in fact they are falling. This is hardly a recipe for the bottom of a housing market, so I believe prices still have much further to fall.
However, eventually the bottom will arrive and that will be a great step on the road to recovery. It will enable banks to actually place a realistic valuation on a lot of their bad debts and allow credit markets to take proper stock of the situation and start moving forwards.
What about the retailers? Well, they brought in massive discounts over the pre- and post-Christmas period which lured consumers into the shops. However, their profit margins must have taken a battering and I doubt the increased sales volumes really made up for this.
In addition, there is still far too much retail space. There are a few empty shops in pretty much every city centre by now.
The credit binge of the last 10 to 15 years will not return. I think this is a good thing but, sadly, Government policy seems like more of a hindrance than a help right now. Trying to spend your way out of trouble is a perverse strategy. Its proponents are quick to cite John Maynard Keynes but what they forget is that there are two facets to Keynes’ theory. He suggested that governments could spend their way out of an economic bust but he also said they needed to stockpile money during the boom. Gordon Brown and his Government totally failed to do this.
A VAT cut that reduces prices by 2.13 per cent will cost the Treasury over £12bn but is hardly going to revive the economy. It is just pouring good money after bad.
Perhaps the Government should start by putting its own house in order. There is no quick fix to this mess but a starting point would be to cut the bloated public sector by slashing spending by at least £100bn, which represents just a small part of the total spend. We do not need to do this by sacking essential staff but by culling layers of unnecessary middle management.
Abolishing quangos would be another step in the right direction because we waste more than £100bn on these. Unfortunately, the Government believes its own propaganda and the Opposition appears paralysed.
The lesson for investors is that more than ever, they need to take good care of their own affairs.
A change of Government seems likely in a couple of years but whoever is running the country will certainly want to get their hands on more of your money. It is time to bunker down and make good use of all your various tax shelters such as Isas or Sipps. Pretty much every adult has allowances of at least £10,800 a year through those two means, allowing you to protect a big chunk of your savings from the taxman.
Mark Dampier is head of research at Hargreaves Lansdown