Trevor Law: Cut your waste and soothe your pain...

Sep 3 2010 By Trevor Law

The impact of Government policy to deal with the fallout from the credit crunch is only just starting to take effect and I believe that people are only just beginning to realise the sacrifices that are going to have to be made to get the country back on its feet.

The legendary investment manager, Neil Woodford of Invesco Perpetual, believes that we are two years into a six or seven-year cycle of deleveraging which will require individuals, companies and governments to reduce present levels of debt.

The record low interest rates have saved many of those who are over-borrowed, allowing this debt to be serviced. But it also needs to be repaid and an increase in interest rates would cause severe problems for many.

With more job losses to come, especially in the public sector, and details of Government cuts to be announced in October, investors should be trying to anticipate what the impact of this will mean to their holdings in the coming years.

As with any sick patient, the medicine has to be taken. It tastes horrible at the time but it is well worth it when you get better and there is no doubt that our economy will come out leaner and stronger in due course. Everybody needs to understand what we will need to go through to make this happen and facing up to it and preparing for it will be a wise thing to do instead of burying your head in the sand.

It is going to be a long time before 100 per cent mortgages return so young couples hoping to buy their first home need to understand this, cut their cloth accordingly and start saving towards a 20 per cent deposit.

Charlie Bean, the Bank of England’s deputy governor, has voiced the view that “direct constraints” may be needed to restrict access to the huge levels of credit that resulted in the current economic turmoil.

The boom years in the property market have meant average prices of homes in the UK may have reached levels that mean it is unrealistic to expect a return to the standards decades ago when homebuyers could borrow no more than three times their income.