How Black Monday will affect you

The impact of this week's crash will be felt by everybody. Sean O'Grady and James Daley explain why
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The Independent Online

The housing market

Property prices have fallen by about 10 per cent since their peak last year and today's data from the Nationwide is likely to show that loss extending to about 12 per cent.

The slowdown, whose scale has taken almost everyone by surprise, has been caused mainly by a shortage of mortgage products and of funding, especially for first-time buyers. House prices remain high by historical standards and in relation to peoples' incomes, even after the falls.

The forward signals suggest that prices will fall by a further 10 or 20 per cent. This has encouraged would-be buyers to stay on the sidelines, exacerbating matters. Confusion over policy on stamp duty has also not helped and, on its own, the "holiday" will not support values by much.

Mortgages

Mortgage rates fell during most of August and September, and some lenders had been relaxing their stringent criteria for new borrowers. However, the mortgage market has now gone into reverse. On Monday, more than 11 per cent of all products were withdrawn and any new products being issued are dearer.

If you're in the market for a mortgage, you need to move quickly. You could pay much more in a few weeks. First-time buyers need at least five and preferably 10 per cent of the value of a property, and they'll need a good credit score. The amount that banks will lend relative to income is also falling. If you're buying on your own, don't expect to get much more than 3.5 times your salary, or three times joint income.

The economy

Growth ground to a halt earlier this year and few economists expect the UK to avoid a recession later this year or early next.

Matters have not been helped by the recent surge in inflation, likely to peak at about 5 per cent soon.

The weakness in the economy and expectation that inflation will rapidly subside mean the Bank of England should have plenty of scope to cut interest rates and maybe as soon as next week. They could fall to 3.5 per cent by this time next year. The snag is that the crisis in the money markets means little of that benefit feeds through to mortgage borrowers.

One of the few brighter spots should be the export sector, as the pound has lost about 15 per cent of its value in the past year.

The pressure on public finances, especially from nationalised banks, also means drops in public spending and no tax cuts, whoever is in power.

Unemployment

Joblessness has been on the rise for seven months and is accelerating. About 138,000 people were made redundant between May and July, the biggest rise since the early 1990s. The total stands at 1.7 million, the highest in almost a decade. Unemployment could reach two million by Christmas. Announcements of job losses have already come from ITV News, Ford, Lehman Brothers and the travel group XL. Other troubled financial institutions are expected to follow suit before long.

Savings

So far, savers have been the real winners of the credit crunch. With the capital markets drying up, banks and building societies have been desperately trying to attract more depositors with high-interest savings accounts. The best rates on the market are over 6.5 per cent.

However, be careful who you put your money with. While the likes of HBOS and even Bradford & Bingley have not been allowed to fail, the Government has not yet explicitly promised to back the entire retail savings market and smaller institutions could still be at risk.

The good news is that the Financial Services Compensation Scheme will back the first £35,000 of your deposits with each institution, although this money could take weeks, if not months, to be paid out.

If you want absolute security, Northern Rock and National Savings & Investments – which are both Government-owned – are the only places where you can be 100 per cent certain your money will be there at the moment you want it. However, if you've got savings with any of the larger banks – such as Abbey, HSBC, Barclays or Lloyds – there's little more than a one-in-a-million chance that your money won't continue to be there for you when you need it.

Investments

Stock markets around the world have plummeted on the back of the banking crisis. On Monday, the US market saw its biggest one-day fall in history, while the UK had its eighth worst day, wiping billions of pounds off people's pensions in a few hours. Although the markets recovered slightly yesterday, there are likely to be several months of volatility ahead.

As bad as it looks, however, the long-term investor should try not to get too bogged down in the day-to-day movements of the market. Anyone who drip-feeds regular savings on pension contributions into the market every month will be getting more shares for every pound they invest.

If you're close to retirement, or are investing for the shorter term, you should keep a good proportion of your money in lower-risk asset classes, such as bonds and even cash.

Unless you need your money imminently, the worst thing you can do in volatile times like this is panic and sell-up, as you'll only be crystallising a loss. If your portfolio is well diversified, its value will recover in time. But if you're concerned you've got too much exposure to equities, make sure you seek professional financial advice. To find an adviser in your area, visit www.unbiased.co.uk.

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