|
|
| The UK housing market: a bubble about to burst? |
by Inflation remote forever?
|
#1000637
of 3278
 12 Nov 2002
11:06 AM |
Drymartini
I totally agree with all your comments. I would appreciate your thoughts on the following scenario, though:
Gordon Brown will be forced to reassess his budget deficit from some £11 billion to about double that this year, and more next year. Corporate tax and individual income tax revenues are likely to decrease further. The pull on the public coffers of the increased wage demands in the public sector as well as the need to inject finance into anti-terrorists measures (at present woefully underfinanced) not to mention the probably forthcoming war with Iraq will further the deficit.
What is the Chancellor to do? Go down the Japanese route, or live up to his Keynesian credentials and print money? If so, the nominal debts will be eroded, the banks will be bailed out and the economy will reinflate, some year or so after the war with Iraq. And is it in the expectation of such a scenario that the first time buyers are piling in (apart from the obvious fact that all of them can't fit under the Waterloo bridge)?
In short: how do you see the situation in 2-5 years from now? Euro for your thoughts. |
|
Charity begins in the banks?
by rev.hk
|
#1000629
of 3278
12 Nov 2002
10:47 AM |
Dear Hoogstraten,
The reason why Extradry is right and you are close to irrelevant is that you seem to think that banks are charities. Most freeloaders do. Thankfully, the banks are not.
When credit conditions start to tighten - as they are now - banks typically do two things. First of all, they increase their provisions for bad loans. In other words banks increase the amount of money they put away to write off an increase in non-performing loans. They do this because they are protecting themselves and their shareholders from either a hostile takeover which would occur if they suffered huge losses and their share price collapsed or a run on their deposits. If you havd even bothered to read up on the state of the global economy, you would already know that this is what most banks are doing.
Second, they move their asset mix away from risky loans such as mortgages etc and start buying bonds such as gilts and sovereigns. Rather than earn interest on loans, the banks start to make money on the spread between the amount they earn on bonds and the amount they pay out in deposit interest.
Neither of these actions is positive for the property market...unless of course you believe that banks have a duty to provide free lunches for idiots who can't be bothered to make a living through hard work and risk taking.
I suggest that instead of wasting our time, you start reading the financial press and look at some of the recent statements made by financial institutions involved with the UK property market. |
|
Nick "A Scenario"
by Shareholder
|
#1000628
of 3278
12 Nov 2002
10:34 AM |
Nick the past is not always a good guide to the future!
My RAILTRACK shares went from £3.50 to £17, BT went from £3.50 to £15.
Now look where they are RAILTRACK £2.50, BT £2.00.
Property prices went down some 20% after 1989 and only regained their 1989 values in 1999, in real terms , the after inflation figures were far worse!
It seems to me the more rapid the rise the more rapid will be the decrease in value should job insecurity and other events take over. I have several properties and I am in the process of selling them all! The reason is the political climate and the nanny state, to much state interference and the future economic outlook.
Affordability is the key to property prices and I believe is the reson that the property market is at a peak at present and will not continue to increase at the rates of the past few years. |
|
WAKE UP! THE CREDIT CRUNCH IS HERE!!
by Extradry Martini
|
#1000627
of 3278
12 Nov 2002
09:56 AM |
Mr. Warren:
You are of course right about what the prudent mortgage borrower should do. The problem is that borrowers and lenders alike have not been prudent and there are many, many borrowers who are unable to put aside more money. In fact, because “affordability” of monthly payments has been the mantra, any change in circumstances will force many to sell. Also, I think you have the inflation factor the wrong way round. Inflation actually amortises your loan for you so it has been very beneficial over the years. However, inflation is dead for the foreseeable future, so any fall in real values (40% in the last bust) will also be seen in nominal values (only 14% last time).
Milton Freidman:
Amusingly you tell me that I am ignoring macro economics, then you give me the shallowest interpretation of macro economics I have read in this forum! You talk glibly about supply and demand but do not even bother to study what causes these factors (and no, it’s not the number of houses being built against the number of people still renting), or how quickly they can change. For a real analysis of macro economics read my earlier posts, or even better those of Rev HK and Engineer (they’re between posts no. 300 – 500) – I can’t be bothered to explain again if you can’t be bothered to do your homework.
By the way, you are wrong when you say:
“Secondly, the percentage of income paid toward mortgages is nowhere near the level of the eighties”
Hoogstraten
You said:
“You say you are a banker – do you mean a bank teller?”
How pathetic! Do you think that it gives weight to your argument? – How old are you?
You also said:
“Your thesis that there is an imminent credit crunch due in the residential property market in Britain is at best remote”
You clearly haven’t been reading your FT! Long term credit has been and is continuing to be re-priced across the board. Credit spreads are at record highs and are continuing to rise. This has affected ALL types of credit in the wholesale debt markets – no one has escaped. It is costing the average borrower 1.5% more to borrow term money relative to swaps than 2 years ago already. As banks are the largest bond investors, they are getting hit on two fronts: Their cost of term funding has risen and the value of their existing investments has fallen. Is the mortgage borrower is immune to this? Is his credit rating is better than, say, General Electric or Barclays bank? Of course not – the current situation in the mortgage market is untenable, and the Council of Mortgage Lenders realise this (see previous posts).
The credit crunch is not an “unlikely scenario” – it is already here!
You also wrote:
“Why would the banks pass on this higher risk of non performing loans (albeit this risk does not seem to exist at the moment), when:
1) This would simply exacerbate the problem, causing a spiral of non-performing mortgages.
2) Other banks would presumably still be performing well, and would not need to change rates, hence would take their market share.”
What??? Have you thought this through at all? Have a think about what you said there, if you still think this is rational, let me know and I’ll explain it to you. |
|
A Scenario
by Nick
|
#1000626
of 3278
12 Nov 2002
09:47 AM |
Would anyone have any suggestions about the following scenario:
I am about to buy my first 2 bed flat with a 18% deposit and 1 years mortgage payments in hand
The flat was built in 1987 and sold for £41k.
I am buying the flat for £90k. That is an appreciation of just over double in 15 years.
Its very near Leciester Train Station in the East Midlands in a desirable area ( 5 min walk)
I intend to live there for at least 3 years.
I am a contractor hence my income is variable.
Looking at how house prices have increased in London ( double in 5 years in some parts ) I am thinking that the place I am about to buy has not experienced the tremendous growth as many reports claim.
Any opinions appreciated… for better or worse…. |
|
Too many martinis
by Hoogstraten
|
#1000625
of 3278
12 Nov 2002
01:09 AM |
Extradry Martini,
Some muddy the water to make it appear deep.
You say you are a banker – do you mean a bank teller?
Your thesis that there is an imminent credit crunch due in the residential property market in Britain is at best remote. Britain is not an emerging market. I would dispute your inherent contention that widespread default of mortgages is likely. Low interest rates mean that mortgages remain extremely affordable.
Presuming your unlikely default scenario transpires, will the retail banks pass the bulk of these costs on? The retail banking industry is highly competitive in the UK market, but it is still very profitable. Market share and economies of scale are important in a market such as this. In the short run, lower margins in a few selected banks might possibly occur. Why would the banks pass on this higher risk of non performing loans (albeit this risk does not seem to exist at the moment), when:
1) This would simply exacerbate the problem, causing a spiral of non-performing mortgages.
2) Other banks would presumably still be performing well, and would not need to change rates, hence would take their market share.
A bank makes money by managing risks. In terms of money market and bond financing, banks are going to continue to correctly assess the risk of widespread default as extremely low, and price the rates accordingly.
Your view of a credit crunch is consistent only with a Great Depression. I think this is hysteria on your part. |
|
Warren
by Si
|
#1000624
of 3278
12 Nov 2002
12:56 AM |
'Consequently, surely the prudent borrower will thus fix his cost of borrowing for many years to come'
Fair enough, anyone acting intelligently would get a good long fix of 10 or even 25 years.
But they're not. The majority are still buying variable rates or discounted trackers.
They appear cheaper in the short run, which is just as well over the short-term as these people are taking on mortgages which are - according to 50 years+ of mortgage-industry's hard-gained experience - too big to be safe over the long run and they need all the help they can get.
This is exactly what's happening, I know these people, my 1st-time buyer peers and colleagues, only one of them has a fix, and that's only a 3-year!
If I remember correctly this is backed up by statistics in the quality press, but it's a while ago and I couldn't give you a reference. Sorry.
A significant proportion of new borrowers may well be (a) financially gung-ho and (b) getting oversized mortgages at variable rates, simultaneously. Not prudent borrowers.
True, one can protect oneself from the market to a degree, but one cannot protect the market from itself. And even though you can muddle through some negative equity, it may be safer and cheaper to avoid the risky situation in the first place. Prudence indeed. |
|
Quote from the FT
by sho_ryuken
|
#1000623
of 3278
11 Nov 2002
11:43 PM |
It was amusing to see the article "A two speed economy heading for a crash" in the Comment & Analysis section of the FT today, if only because I thought of this forum. I'd post you the link but it's subscription only... 
Anyway, we have had the Bank of England warning about the risk of a crash, plus the chief economics editor of the FT, as well as the chief exec of the Abbey National of all people. The Council of Mortgage Lenders has been asking for a rate RISE to slow down the housing market before it crashes, and the National Association of Estate Agents warned first time buyers some time ago about entering the market.
And some of these people have a vested interest in talking the market UP !!!
Why are they saying these things then ?? I wonder.... |
|
Mr Friedman
by SL
|
#1000622
of 3278
11 Nov 2002
08:57 PM |
That old Supply / Demand argument?
Who are the people who are in a position to make new purchases? The increase in households is not due to an increase in population - it is due to an increase in pensioners and broken families. Neither segment will be prepared or able to pay the current prices and neither will the majority of first time buyers. Demand will decrease as prices rocket (it already has - many of my colleagues are waiting for a crash prior to buying and they're a fairly representative group). As you so rightly point out, prices are linked to demand - and will therefore decrease. Btw, if there really was a shortage of accommodation, surely the rental markets would be booming? After all, it's cheaper and lower risk to rent. Demand? Where? Only from optimistic speculators. |
|
freedom to chose
by Milton Friedman
|
#1000621
of 3278
11 Nov 2002
06:59 PM |
Dear Mr Extra Dry
Sir, full markets on your dissertation – however micro economic knowledge does not infer macro economic knowledge. I’m sure you know your job really well – but not its overall contribution to the organisation.
One must view the market as a trend over a period of years and not just a daily market-to-market movement. Your suggestions are naïve - the housing market is not only driven by supply side economics. Demand in the said market also has an effect. This is simple economics my friend.
The current prediction is that there will be a requirement for 1 million new homes in the next 10 years. All the current house prices in London are doing is clearly to drive people out to other areas of the country. Which in turn is driving property up in all the country. On a micro level this has been happening in London for years. I’m sure if you look on the commuter trains from East Anglia into Liverpool Street you will see a marked increase in the people on them. This happens globally if you view New York, Sydney or Auckland.
Secondly, the percentage of income paid toward mortgages is nowhere near the level of the eighties and neither are the interest rates. Economic stability is far better than at that time and secondly you also have to consider the general trend of the housing market is always net up – I wish I could say I had the same confidence for my pension fund or endowment.
Finally your suggestion that the overall credit risk of the banks will eventually be passed on in terms higher mortgage rates i'm not too sure about. The level of default now is not a marked as the 80’s. It can be viewed that the London market is flattening in some areas, but not reducing, but in others there are marked increases (Hackney and Dagenham). As long a demand remains to take up slack then your logic is flawed |
|
Housing
by M r Warren
|
#1000620
of 3278
11 Nov 2002
06:29 PM |
To ExtraDry - I appreciate what you are saying - but - remember, there are many lenders fixing their rates for many years [I even understand that a building society for the Whole Period of the 25 loan - at a cost of not much higher than the variable currently offered - see very much earlier post]. Consequently, surely the prudent borrower will thus fix his cost of borrowing for many years to come [even its term of the mortgage] Thus, in a very small inflationary world at present eg 2 % per annum wage increase in 10 years is nearly a 22 % rise in your wage, and whilst the cost of borrowing remains the same, this can represent a small chipping away at the mortgage. A tip would be to increase the repayments by the annual rate of inflation perhaps, and thereby either build credit on your account or reduce the term.
I believe there are many ways to protect yourself. |
|
How banks suffer
by Extradry Martini
|
#1000619
of 3278
11 Nov 2002
05:38 PM |
Mr. Warren
As a banker, I’m afraid to say that the person being simplistic is you. What Guest below was doing was explaining (in a simple way) how credit risk can work and how it affects the ability of a bank to lend. What he was talking about was that the spread a bank charges between the rate at which it borrows in the money market and that at which it lends to mortgage lenders has to widen as the proportion of bad and doubtful debts or defaults increase, otherwise it is operating at a lower margin. Like all businesses, this lower margin may be sustained if for competitive reasons, or it may be unsustainable, or even be negative. Thus the pressures on the lending criteria for the other borrowers (and especially new business) become more restrictive.
This is true in general, but most of the restriction is passed on by the bank as a result of a higher cost of money to him resulting from the deterioration in his own credit worthiness. Ah! – I hear you say – But my mortgage lender is still robust and nothing has changed. I’m afraid to say that your mortgage lender, if he is a bank, borrows money from 3 sources: The money market, the long term credit markets (bond markets) and the central bank (Bank of England).
Let’s start with the BoE. The Bank of England acts as “lender and borrower of the last resort” – this is to control liquidity in the cash market on a daily basis, not to lend money to any bank that wants it. What it does in a cash shortage on any given day is ensure that the lending rate between the banks does not go too high or too low as a result of a shortage or excess of money in the system. This it does at the base rate (it’s a little more complicated than this, but it doesn’t matter). So the bank of England is only there to sort out system-wide imbalances, not provide loans to the banks.
The main way a bank borrows money is in the “money market”. This is how the banks lend and borrow money amongst themselves and transactions are anything from overnight to 1 year, with rates that are changing all the time in the market, but once a deal is done, they are fixed at that rate for the term of the loan/deposit.
The third way a bank can finance itself is through long term money in the bond markets. This generally works with a fixed rate bond being issued for a fixed term (up to 30 years). The money goes via a derivative called an interest rate swap, so that (again simply) the bond investor has lent money at a fixed rate while the bank is borrowing at a rate that is reset every, say, 6 months.
Why do banks borrow in the bond markets? Well, what it means is that they can fix the relative cost of their money (relative to money market rates) and assure themselves of liquidity for the term of the bond.
What then happens when the bond matures? Well, they need to either call in the money they have lent in order to repay the bond, or they need to issue another bond. BUT, they have lent all this money out in mortgages and they can’t just ask for it back – they are contractually obliged to their clients. So, they
have to refinance. Therein lies the rub. If the bond market is saturated with debt, or it believes that banks have too much of it, then there is less demand for bonds, and borrowing long term money becomes more expensive. This is EXACTLY what has just been happening – across the board – and what has signalled the start of the credit crunch. It is only a matter of time before this higher cost gets passed on. |
|
To Housing
by Mr Warren
|
#1000618
of 3278
11 Nov 2002
04:31 PM |
To last post re : credit risk. Do not assume the simplicities.
First - The banks lend and receive monies afterwards from month 1. Thereafter, after several months they can build up enough money from customers repayments to lend to a further customer thereby compounding their gains. The differences can end up being quite high.
Secondly - different lenders will have different client bases and therefore not all will need to raise rates. The secret is of course to either get deposits to keep rates down or factor a higher interest rate into cases of 100 % borrowings for the additional risk. |
|
Credit Risk
by Guest
|
#1000617
of 3278
11 Nov 2002
01:50 PM |
A strong thread running through many of the posts has been that low interest rates will continue. This maybe true, but it doesn't mean that low mortgage rates will continue.
Let us take a simple example. The bank borrows a million pounds at 4% from the market and then packages it into 10 X 100,000 pound mortgaes which are then lent at 5% on a 100% basis, i.e no housebuyer equity. They get in 50,000 from the borrowers, pay back the 40,000 to the market and spend the bulk of the 10,000 difference on staff costs, bank buildings, IT etc.
Now if one of the borrowers defaults (e.g they lose their job), the bank flogs the property quickly in the market for 95,000 and take a hit of 5,000. Suddenly the bank is facing a massive loss for the year as half their revenues have gone.
To cover this the bank has to increase its lending rate from 5% to 5.5% - this is simplistically what happens when credit spreads widen.
So don't just assume that because BOE rates are low that mortgage rates will stay low. |
|
New Labour are partly to blame
by The Scream
|
#1000616
of 3278
11 Nov 2002
12:54 AM |
1) Gordon (who promised us no more boom and bust) has left it to Eddie George to take responsibility for the economy as he didn't want to put himself in the same position as Norman Lamont on the ERM. Staying in power is No.1 priority.
2) New Labour red tape has resulted in local authorities approving of a record low number of new houses.
3) New Labour's generation of bogus jobs such as teacher's assistants, red-cap "police" and more NHS doctors than you can shake a hospital bed at (literally), means the number of unemployed is out of step with the economy. Staying in power is again No.1 priority.
Combined with the dot com Boom and Bust, companies are highly in debt and banks are bust with bad loans and stock holdings which have fallen badly. New Labour can't be blamed for this but Gordon shouldn't have promised no more boom and bust when he has no such control over the dotcom boom.
The low interest rates to counter this only build up the pressure and what a pressure!
The borrowing rate for homes is up to six times income NOT five.
Unemployment will get worse from here, not least because New Labour are driving companies to the Far East in record numbers with red tape and the 2% NI next April on top of all the other taxes.
If and when the local authorities get their fingers out the number of new homes built will further depress the market (already started in London).
Those reading this forum will be selling (I'd recommend now if you haven't already, JD Rockefeller said "only a fool waits for top dollar"). I've already sold mine and found to my suprise that I can live off the interest (gilts). I'm in the process of moving as my landlord (foolishly) tried to put up the rent and I found somewhere better and cheaper. The buy-to-let market is already boom and busting and these will also be sold off. Finally, foreign workers will be going home in the coming recession. |
|
