The big freeze
The from and were the occasion for a modest sigh of relief.
They were the banks perceived by regulators and markets as most vulnerable to a hysteria-induced run caused by the debacle at Northern Rock in mid September.
But in extraordinarily challenging conditions in credit markets, they have succeeded in securing requisite funds from commercial sources 鈥 with A&L obtaining a jumbo two-year loan to cover maturing debts.
And although neither of them steered clear of the poison of structured credit, their losses from collateralised debt obligations, asset-backed securities and SIVs fall into the category of embarrassing and irksome, rather than life threatening.
Of the two, Alliance & Leicester has a bit more egg on its face from structured credit than its rival.
So far, so reassuring.
What about the outlook?
Well three-month sterling Libor has been climbing for the past fortnight and is back at almost 6.6 per cent 鈥 well above the Bank of England鈥檚 policy rate of 5.75 per cent. It means that funds for banks are both expensive and are still relatively difficult to obtain.
So Alliance & Leicester expects to lend less in 2008 and charge more for what it does lend.
It鈥檚 symptomatic of a new rationing of credit that will make most of us feel a bit poorer.
Interestingly, however, A&L doesn鈥檛 expect to be able to increase the interest rates it charges customers on mortgages and other loans quite enough to compensate for the rise in its cost of funds.
So its profits will fall.
Bradford & Bingley is more optimistic about future conditions in its core market of providing mortgages for buy-to-let purchases 鈥 although that optimism is based on the unprovable expectation that in a housing market downturn there will be an uptick in demand for rented accommodation.
Note that, according to the Nationwide, there was a sharp fall in house prices in October.
That decrease precedes the full onset of tighter credit conditions for all of us 鈥 although statistics published minutes ago by the Bank of England show that there was a sharp fall during October in both mortgage approvals and mortgage lending by British banks.
So it鈥檚 all reason enough to fear that we may be about to experience the most prolonged downturn in the housing market for 15 years or so.
The conditions in credit markets are a turbulent icy wind, wreaking sporadic damage and making us all feel colder and gloomier.
UPDATE 10:40 AM: The Governor鈥檚 statement to the Treasury Select Committee this morning is almost enough to make grown men weep. It says that the Monetary Policy Committee is expecting an unspecified period of rising inflation and slowing growth and that the outlook is 鈥渉ighly uncertain鈥. Yuk.
Mervyn King also fears a further deterioration in money-market conditions as we approach the year end. He is particularly concerned about the possibility that short-term interest rates will spike relative to the policy rate.
So he has announced a new five-week liquidity facility to assure the big banks there will be enough cash in the banking system over the Christmas holiday period.
I'm 
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THe jury is still out on this one!
nobody has the last word on housing crash of lack of it. The arguments on both sides are "finely balanced" (as the BOE would say).
I think it all hinges on what happens in the next 3-4 months when a lot of people comming of fixed rates suddenly find they have to pay more for their houses. Also if house prices keep plummeting, prospective buyers will start to hold-on on purchases leading to greater falls in prices (in theory).
On the other side there is not that much housing to go round anyway (population rise and household rise due to divorces and stuff), so nobody can precit with a great deal of accuracy what will happen.
However I would tend to side with the bears on this one (albeit only slightly) people still need places to live in at the end of the day.
I do take issue with the statement by B&B that the "fundamentals are sound"... what a load of tosh..
Could we expect a merger of A&L, B&B and NL in the future? It would be one way of increasing profits by cutting costs. Otherwise each will be takenover over time.
I'm not sure 0.8% can be called "sharp" Robert- interesting choice of language once again!
Don't the Nationwide figures relate to November?
I read something earlier in the week saying that the increase in new build Social Housing could flood the market over comming years.
I guess this would effect rental more than buyers markets - but who knows.
It was an interesting twist.
Guy
So B&B think that less sales means more rents. Can anyone with a longer memory than mine tell me what happened last time on the rental front? Anecdotally I've heard that the rental market crashed along with the sales market, but I've never seen any figures. Anyone got any sage comments?
Please, please check my responses to this blog since the begining of September. All the long I've been saying that the housing market was gonna fall. I also said that inflationary pressures (food, fuel inparticular) would limit the BoE's room to help with cuts in intrest rates. Indeed, one might suppose that the reason the BoE, not wishing to jump too quick, has held off lowering rates is presicisely because its main charge is to control inflation (with intrest rates its only tool) rather than to massage credit markets at a point when no one actually knew just what sort of bad shape they were really in.
If one looks at Wall St and the Fed, there are those in the US who are greedily anticipating and devouring every rate cut the Fed is willing to offer while all the time such moves are not enough to end the downward spiral on which the US economy (led by its own housing woes) is already set on. With each US rate cut, the dollar weakens, oil rises along with inflation and the rest of the world becomes increasingly uncompetitive. Recession?
Now, as for the Bradford and Bingley, I fear their expectations will be disappointed for several reasons.
a/ The buy-2-let market has boomed at a time of rising house prices. Most buy-2-let landlords of the last 5/6 years have brought expecting to make a quick lump sum gain first and only break even on the rent second. In a falling house price market (and that's what we now got folks) there is no lump sum gain... no buy-2-let demand.
b/ The demand for property to rent has increased - but the size of rents hasn't. So many have piled into buy-2-let that while demand is healthy, even steady, so is the supply so there is no upward pressure on rents.
c/ Which means the maths of buy-2-let don't make sense. A 2 bed victorian terrace in Ipswich rents at 拢500-拢550 per month. To buy it costs 拢140,000. If 拢100,000 (you have a 拢40,000 deposit)cost 拢600 per month (approx.)on a morgage, that leaves a shortfall of 拢100 per month which you, the landlord, have to fund. Now add on the cost of insurance, managment fees and running repairs... aswell as those falling house values... Buy-2-Let anyone?
Please, please check my responses to this blog since the begining of September. All the long I've been saying that the housing market was gonna fall. I also said that inflationary pressures (food, fuel inparticular) would limit the BoE's room to help with cuts in intrest rates. Indeed, one might suppose that the reason the BoE, not wishing to jump too quick, has held off lowering rates is presicisely because its main charge is to control inflation (with intrest rates its only tool) rather than to massage credit markets at a point when no one actually knew just what sort of bad shape they were really in.
If one looks at Wall St and the Fed, there are those in the US who are greedily anticipating and devouring every rate cut the Fed is willing to offer while all the time such moves are not enough to end the downward spiral on which the US economy (led by its own housing woes) is already set on. With each US rate cut, the dollar weakens, oil rises along with inflation and the rest of the world becomes increasingly uncompetitive. Recession?
Now, as for the Bradford and Bingley, I fear their expectations will be disappointed for several reasons.
a/ The buy-2-let market has boomed at a time of rising house prices. Most buy-2-let landlords of the last 5/6 years have brought expecting to make a quick lump sum gain first and only break even on the rent second. In a falling house price market (and that's what we now got folks) there is no lump sum gain... no buy-2-let demand.
b/ The demand for property to rent has increased - but the size of rents hasn't. So many have piled into buy-2-let that while demand is healthy, even steady, so is the supply so there is no upward pressure on rents.
c/ Which means the maths of buy-2-let don't make sense. A 2 bed victorian terrace in Ipswich rents at 拢500-拢550 per month. To buy it costs 拢140,000. If 拢100,000 (you have a 拢40,000 deposit)cost 拢600 per month (approx.)on a morgage, that leaves a shortfall of 拢100 per month which you, the landlord, have to fund. Now add on the cost of insurance, managment fees and running repairs... aswell as those falling house values... Buy-2-Let anyone?
Credit where credit is due. Both B&B and A&L were given a murky outlook by analysts etc on the back of the Northern Rock issue, but here they are showing that they have changed there business, managed there credit funding very well, and continued to perform well as the latest figures show. So less of the pesimism against the banks and give them some credit for a change. Wll done B&B and A&L
Credit where credit is due. Both B&B and A&L were given a murky outlook by analysts etc on the back of the Northern Rock issue, but here they are showing that they have changed there business, managed there credit funding very well, and continued to perform well as the latest figures show. So less of the pesimism against the banks and give them some credit for a change. Wll done B&B and A&L
It's worse than that.
Any goodwill people might have held towards the financial services sector is rapidly dissipating and there is a long overdue realisation growing that over reliance on the sector for virtually all the UK's growth by feeding consumption has been misplaced and highly dangerous.
It's been made worse today by the so called "NatWest three" admitting their guilt whilst the assumption across the country was that they completely innocent because they were British.
The entire industry is now seen for what it really is. Less than supportive of UK industry - that's real industry - greedy and self obsessed.
Next time Gordon Brown or Alistair Darling tells us we should be proud of the fact that UK is the most powerful financial centre on the planet we should be asking "so what?" It hasn't done the rest of us any damn good and its incompetence is in danger of bringing the entire economy down.
Time for a rethink and time for a lot more regulation and transparency.
A 拢10,000 deposit will "buy" you a 拢200,000 property at a 95% LTV mortgage.
A 拢10,000 deposit will "buy" you a 拢50,000 property at a 80% LTV mortgage.
Regulations, shareholders and depositors are going to put pressure on lenders to make LTV's safer than the last few years.
Dropping prices will need to be considered in LTV calculations.
Hang on to your hat ........
Trust me we are all in for a bumpy ride over the next 12 months.
If you have a big mortgage and owe large amounts of money on loans and credit cards I would be very worried.
Please, please check my responses to this blog since the begining of September. All the long I've been saying that the housing market was gonna fall. I also said that inflationary pressures (food, fuel inparticular) would limit the BoE's room to help with cuts in intrest rates. Indeed, one might suppose that the reason the BoE, not wishing to jump too quick, has held off lowering rates is presicisely because its main charge is to control inflation (with intrest rates its only tool) rather than to massage credit markets at a point when no one actually knew just what sort of bad shape they were really in.
If one looks at Wall St and the Fed, there are those in the US who are greedily anticipating and devouring every rate cut the Fed is willing to offer while all the time such moves are not enough to end the downward spiral on which the US economy (led by its own housing woes) is already set on. With each US rate cut, the dollar weakens, oil rises along with inflation and the rest of the world becomes increasingly uncompetitive. Recession?
Now, as for the Bradford and Bingley, I fear their expectations will be disappointed for several reasons.
a/ The buy-2-let market has boomed at a time of rising house prices. Most buy-2-let landlords of the last 5/6 years have brought expecting to make a quick lump sum gain first and only break even on the rent second. In a falling house price market (and that's what we now got folks) there is no lump sum gain... no buy-2-let demand.
b/ The demand for property to rent has increased - but the size of rents hasn't. So many have piled into buy-2-let that while demand is healthy, even steady, so is the supply so there is no upward pressure on rents.
c/ Which means the maths of buy-2-let don't make sense. A 2 bed victorian terrace in Ipswich rents at 拢500-拢550 per month. To buy it costs 拢140,000. If 拢100,000 (you have a 拢40,000 deposit)cost 拢600 per month (approx.)on a morgage, that leaves a shortfall of 拢100 per month which you, the landlord, have to fund. Now add on the cost of insurance, managment fees and running repairs... aswell as those falling house values... Buy-2-Let anyone?
Housing corrections are like slow moving train crashes.
There is no excuse not to position yourself and your family to take it into account.
Forget the distraction of day-to-day work for a moment and think about what you should do with your wealth.
A 拢10,000 deposit will "buy" you a 拢200,000 property at a 95% LTV mortgage.
A 拢10,000 deposit will "buy" you a 拢50,000 property at a 80% LTV mortgage.
Regulations, shareholders and depositors are going to put pressure on lenders to make LTV's safer than the last few years.
Dropping prices will need to be considered in LTV calculations.
Hang on to your hat ........
Trust me we are all in for a bumpy ride over the next 12 months.
If you have a big mortgage and owe large amounts of money on loans and credit cards I would be very worried.
Some good news in here for once but it doesn't fit the story which is 'global meltdown'. The oil prices fell back a few days ago but that wasn't as widely reported as when it went up!
Really we're just now getting the same thing every day - good news,a fluke; bad news, evidence of the forthcoming apocalypse.
There will be a sharp slowdown / recession simply because the media want it to happen and will keep going 'til it does just as much they oversold the growth in the last few years when 'times were good', property was 'booming' and Gordon Brown was handing out gold buttons to children.
In reality, most people were just middling along with 'real inflation' i.e. the essentials - travel, energy, council tax etc increasing beyond the stated inflation figures. None wanted to know that the deflationary items such as food were unsustainable in the long run as they were held down by supermarkets strongarm tactics on suppliers. Nor did they spend much time reporting on irresponsible lending based on rising house prices. Why not? Because that spolit the story of continued economic success under New Labour.
Now the sentiment has changed and the reporting reflects that. Tell someone they're going to get run over by a bus every day and eventually they'll become obsessed by buses. In reality, when 'times are good', they're never really that good and vice versa.
Falling house prices are bad if you're borrowing on house equity to make a profit, downsizing or have bought right at the top of the market but good for first time buyers and people looking to move to a bigger house and neutral for most people staying put. Less loans will be bad shortterm for banks profits but the underlying quality of those loans will be much more solid and they won't need to write off those loans at some later stage.
I'm sure we'll be back to Armageddon tomorrow but it would be nice if we could have a few days respite.
".. the unprovable expectation that in a housing market downturn there will be an uptick in demand for rented accommodation."
The expectation is reasonable, but we are starting from a situation of significant over-supply of rented accommodation, as evident in rental yields. What does that mean? If you expect a 5% drop in prices next year, your overall profit if you buy today(before interest) will be zero. Even with a 20% increase in rents, your yield will still be 1%.
Add in higher interest rates, and my feeling is that you have to be very very sure that prices have bottomed out before you add to your BTL property portfolio. Many won't sell their existing properties, but they won't buy new ones either. Some always have to sell. And many will choose to default rather than watch their negative equity hole grow larger by the month.
Mortgage lenders like to put a positive spin on the picture, that's all.
Faced with the asset bubble vs consumer price inflation conundrum we should all be wondering in which direction the 'Moral Compass' is pointing. Over Northern Rock we saw it pointed directly at a) jobs & b) votes, perhaps in reverse order; at all costs (taxpayers) votes and King was over-ruled it appears.
Perhaps the CPI target will have to rise?
Still if Mervyn King's reappointed for a 5 year stint he'll be clearing up a bigger mess in 3 years time.
Brown seems to take advice from Greenspan who since 1987 has provided an ever more generous 'put' for asset markets so it will be interesting how (King Canute) Brown plays this.
I believe that we can all talk ourselves into recession and the media are at the moment hell bent on doing this which is in no ones interest. If they were to be a little more optomistic recession would be less likely, but that doesnt sell news papers and fill blogs !
what about all the unprovable things you come out with Robert?
also you are not correct, the nationwides figures for October were a 1.15% INCREASE - you say it was a fall.
In fact their 0.08% ''fall'' was for November not October as you suggest.
Having watched these figures for years & years, a quarter (not 1 month) is the ONLY sensible guide.
October 1.1% RISE
November 0,08% FALL
December? we shall see.
Any by the way; I have confidence in the assumption of ''more renters in 2008'' from these lenders, as it stands to reason. people wont go and live in cardboard boxes, they will make homes in rented accomodation in the belief they cannot buy.
The Banco Santander may mop up some cheap businesses,A&L,B&B or others.
The Bank of England and others are facing up to reality now and not before time. The quicker Gordon Brown has this reality check the better for all of us.
regards
#18 Pete ..... said "The oil prices fell back a few days ago but that wasn't as widely reported as when it went up!"
That's because perversely it was bad news.. A falling oil price when supply is tight indicates concern over demand which in turn indicates a possible downturn in overall economic activity.
It also doesn't help encourage new investment in new oil reserves. That in turn means that any economic upturn could run rapidly into a supply crunch..
If you want to keep supply going then higher oil prices are better.
Robert, post 22, prices are down 0.8% according to Nationwide and mortgages agreed are down 12% in the last month and over 30% down on a year ago.
Expect to see prices continue to drop for at least the next four to six months. I would expect to see average prices down by between 5 and 7.5% by next April.
Inflation busting price rises in foods, petrol and now train journeys will all help to keep inflation up and the Bank of England's hands tied.
I'm in no way gloating about this but we are all about to reap the costs of Gordon Brown's ten year priming of the UK economy with one aim and one aim only to ensure he succeeded Tony Blair.
I fear this is all going to cost a lot of us our houses, jobs and the lucky ones will have to tighten our belts for a few years.
In order to answer the earlier question about what happened to rentals during a housing "correction"
First few months they increased a bit
but very quickly they fell, because
new rental property bought off distressed landlords and homeowners started to come on the market.
THe lower capital cost meant you cound undercut "normal" rent levels
in any area...
It will be interesting moving forward for banks as who will they lend to? . Will there be any group of people who do not have a bad credit rating one way or another? If you have a loan/mortgage default on one part is likely but also no loans
means you have a poor rating.
UK rating subprime.
I have noted from one of my friends
who has gone bankrupt and been discharged that debts prior to her
bancruptcy are still live and are being bought and sold rather than written off as they should.This
What will happen if she is refused
a mortgage due to bad credit damage by false reporting on her equifax/experian account?
anyone?
Is there anything for which the media can't be blamed?
It amazes me that people seem to think it is the press that causes a housing crash or a run on the banks. Robert Peston may be an influential journalist, but what he says is hardly going to alter economic fundamentals or how much money UK consumers have in their wallets.
And on a related note, would you rather Robert and other talented business journalists did not break big news stories? And it is hardly surprising that Robert does not reveal his sources. Usually the best information comes from those who would be fired and/or put in jail for leaking information.
Some worrying thoughts:
1) Many people are on their credit limit and can't borrow more.
2) Many people are going to have to pay substantially more for their mortgage payments.
3) This means that the amount of money to spend on goods (and hence demand for them) is going to reduce sharply. (remember gearing)
4) This means that the economy is going to shrink - unless retailers reduce prices - which reduced profits - this means a reduction in employment.
5) This means that Government revenue is going to drop (VAT/ Corporation Tax/ Income Tax)
6) This means that the Government is going to borrow substantially more or raise taxes - or shall they simply go to the IMF (again)?
And whilst we are on happy thoughts.
1) britain is already a net importer of food.
2) The population of Britain is estimated to rise by several million over the next few years.
3) This population needs housing (presumably on arable land) as well as feeding/ watering/ sewage, not to mention education/ health benefits.
Anyone want to read Dr Malthus?
were doomed
It may be that the press wants a downturn in the economy so the present government goes into the next election with a dented reputation. Why? Well, the Tories will always look after their own kind so the rich media tycoons can be sure of holding onto more of their cashpile (and may even get hunting back, as a bonus!). Just look at the response from people being told they may have to pay tax (CGT) at 18% rather than 10%; the screams are still being heard. Yet the less wealthy pay more than 18% tax (income tax) on most of their earnings. Whatever the rich have, however much they have, they want to keep it and they probably look towards D Cameron, Esq, to help them remain absurdly wealthy.
"They were the banks perceived by regulators and markets as most vulnerable to a hysteria-induced run caused by the debacle at Northern Rock in mid September."
Can anyone tell me who whipped up the hysteria?
p.s. wake me up when it is over...
Quote from the article on Mervyn King's appearance today...
"The estimated $200bn hit taken by firms was the equivalent to a 1.5% fall in the US stock market, Mervyn King added."
Only 1.5% - what are we all worrying about?
But hold on, bad debts will be written off against profits. The p/e ratio for the Dow is on an earnings multiple of 16. That means corporate America's profits are forecast to fall 24% this year!!! (16 x 1.5)
Wind yourself forward a year, if you still rate these companies the same as you do now then the trailing p/e ratio is still 16 and the stock market has fallen 24%.
It is more likely that you as an investor rate the company less given its performance over the past year...giving a greater fall.
The $200 bn is probably an underestimate based on current projections of house price falls. US house prices continue to deteriorate faster than expected resulting in higher losses per foreclosure as there is less security against which the banks can reclaim their money.
Add in an overshoot....and you can easily see how this 1.5% quote can be turned into a drastic stock market correction.
Weep?
It's simple. When the money supply is increasing, you invest in assets; Property, shares, commodities. When it's static or decreasing you invest in cash or bonds.
Look. All the cash which exists in the world represents the value of all the buyable stuff in the world. The amount of stuff is relatively static, it increases a little every year, a few percent as people build houses, cars, products etc. So if the stuff is increasing at 3% and the amount of money increases at 15%, you get 12% worth of inflation. Tada... stock market and property bubble.
If on the other hand, the money supply is shrinking, money is becoming more valuable relative to other assets, the stock market declines and housing prices fall.
So. There you go. I'll let you work out how and who's manipulating the amount of money which is around. And you should also ask yourself if we'd all be better off without such manipulation.
So house prices may fall - so what! Houses that someone can actually afford to buy without bankrupting ones-self in the process must be a good thing.
This idea that house prices ought to rise like a proverbial rocket is peculiarly British as far as I can see.
As I understand it, many people rent from necessity, not choice, & the B&B may come unstuck here unless credit becomes prohibitively expensive.
It may prove difficult for a genuine few who bought at the top of the market, but I have little sympathy for those who buy hoping for an unearned windfall.
What happens to BTL in a housing crisis? Well from my experience from the early '90's, at the bottom end of the market admittedly, it pretty much dries up. Potential tenants just disappeared into the ether at the same time as potential buyers. I guess they just went home to mum!
It could be interesting to see how many families are prepared to rent rather than buy: if this is the market to which the A&L and B&B refer. But again, I suspect that if there is a down turn what will precede it is a fall in the number of property buyers: so families wont get the option to become tenants because they wont be able to find buyers for their large 3+ bedroom houses.
The painful lesson I learned from the early 90's was that you don't make money from renting - and if you do the taxman takes a big chunk as unearned income, anyway - the only basis for the business model is asset value growth. And over the long term the money is better invested elsewhere; because, as large scale BTL's will find: houses are cumbersome and often illiquid, and never more so that in a downturn(I use the term euphemistically).
11. Scamp wrote
It's worse than that.
Any goodwill people might have held towards the financial services sector is rapidly dissipating and there is a long overdue realisation growing that over reliance on the sector for virtually all the UK's growth by feeding consumption has been misplaced and highly dangerous.
Time for a rethink and time for a lot more regulation and transparency.
It's even worse than you think.
They actually remove value from the rest of the economy.
If you work for a couple of hours and put 100 pounds into your bank account now, it and the interest it generated would be largely worthless in 20 years. The value of those hours you spent working have been taken by someone else.
By lending to one another at increasing rates, increasing the money supply they increase inflation, I don't mean the laughable CPI or RPI figures, I mean asset inflation. This moves value away from the people who actually work for a living, making their money and labour worth less.
You want to know why the gap between the rich and poor is increasing? Inflation is the culprit. The rich don't keep their wealth as cash, they keep it as gold, property, stocks and shares. Items which appreciate with increasing inflation. The poor, use only cash which is devaluing constantly.
We don't need more regulation and transparency, we need more people to understand the nature of money and we need Full Reserve Banking. And a controlled money supply.
Personally, it appears to me that the inevitable happened in August and there is an inexorable slide towards a deep recession. The key figure to now watch is unemployment. If companies start shedding jobs to maintain profitability (or even viability) then the final pillar in the troika will have crumbled. Once we have serious unemployment then we have bad debts, falling house prices and greater demands on government spending with less tax receipts (benefit payment increases and health). Bad situation as #28 points out.
On the buy-to-let market: I don't think this will sustain house prices as people who lose their jobs will not necessarily rent: many will return to family homes. (Older family members with lower mortgages.)
Here's a story which I fancy is quite typical of the past few years: an Edinburgh librarian has bought ten houses over the past 15 years as property has rocketed. Last year his assets outweighed his debts by 拢400 000. He had managed to build-up such a portfolio by withdrawing equity from his home and his early purchases to fund his acquisitions. Being a librarian his salary is not huge and therefore he does not have income to sustain property if the rental market deteriorates and, I suspect, would wish to sell if he sees the value of his property decrease. Anecdotally, he is not alone - the buy-to-let boom has been fuelled by people in such a position who have wanted to turn the huge equity in their homes into a self-sustaining business. This has contributed to rocketing price growth in some areas. A downturn will panic small investors, further drive down house prices and confidence. (I expect the new CGT rate in April will see a lot of property come on the market.)
I remember the previous crash bought a flat for 拢65k in 91 lived in it - it went down to 拢40k by around 94 (early nineties) so I had no option but to stay put and not sell. I recently sold up as the lease was running down and it was on the Thames flood plain. I am wondering if banks will be offering mortgaes on such properties one year on?
Santander Bank? Spanish yes? Who funded the huge Spanish bubble which has now all but popped? Where have they suddenly got all this brass from to go buying other banks?
Just quizzical
Oh another thing - who now has the 25+ billion we sent to NR? Some fat banker someplace? Is this just the interest costs being met by you & me? Would we get upset if a few guys used to million pound bonuses suddenly fell to earth? Nah!
Anyway that aside, there seems to be a lot of denial going on here. Get real, too much debt, inflated asset values, sliced and diced and sold on tricky "vehicles" smoke & mirror stuff. The end is nigh for all this.
I can understand those with these overvalued assets not wishing to see a devaluation in these, but if your nesting and not investing in the house, what the hell. Just sit in there and enjoy the fact your roof is keeping the rain off. Your desire to "climb the ladder" is best left on the back burner. 40 years of paying interest will never be to your gain.
*Ben Hudson wrote*
'I believe that we can all talk ourselves into recession and the media are at the moment hell bent on doing this which is in no ones interest. '
The problem here is just precisely the opposite, the reality is the agenda is being stage managed here by the key stakeholders in the market. In the last few months they have been desperately putting a positive spin on the outlook. The reality is, if they didn't it would precipitate any impending decline. They have created this unsustainable boom with a gullible audience salivating at the prospects of these rises never ending. As someone rightly put it 'house prices are rising because they are rising'. There is no logical explanation by any standards. Now they are already calling for interest rate cuts. The reality is if it costs 30% less to rent than to just service the mortgage these days you've got to be mad to buy any property. This other argument that the immigration demand is causing it is untrue. This is a completely transient demand i.e. when the going gets tough to assume the East Europeans are going to sit firm twiddling their fingers is complete folly. Any way the next few months will determine the degree of decline rather than if there is going to be a correction.
Then you have the TV Beanies churning out the episodes of people still making thousands from property. Don't worry next they'll tell you how you can make millions by investing on the Gaza Strip because the peace process could help you make millions or Zimbabwe because Mugabe is due to die soon. The problem here is not the negative press housing has been getting but quite the contrary.
It nevers ceases to amaze me that performance data from banks is always assumed to be gospel. How many times have US banks claimed they have declared all sub-prime losses only to increase the figure a few weeks later, and the CEO being forced to resign. The A&L and the B&B
will obviously put the most optimistic scenario forward to protect their interests. Is it just coincidence that the data of independant observers, in the financial and housing markets, never matches the optimistic forcasts of those with a vested interest e.g estate agents, builders and banks.
Hi Robert
With respect, I think you're over-stating your case when you say "the Governor鈥檚 statement... is almost enough to make grown men weep."
Sure, there have been some knocks to economic confidence in recent months due to the liquidity flow problems in the financial markets. However, in my opinion, the UK economy is well-placed to weather this storm. Currently, GDP is at a healthy 3.2%, employment levels are good and I note the latest survey from the CBI is sanguine about business prospects following the so-called "credit crunch".
Whilst undoubtedly there are risks to the economy in the guise of some up-side risks to inflation and a possible US recession (although, even here, I'm yet to be convinced that the US will actually go into recession), what we now need is some steely nerves and no panicky reactions from either the Bank of England or Government. In my opinion, we can afford for the economy to slow down as it weathers the battering from the liquidity problems and sees of the current up-sides risks to inflation. This will then place the Bank in a good position to start reducing interest rates next year to kick-start the economy again once the turbulence from the past few months has passed through.
To be perfectly honest, the 1970s economy was "enough to make grown men weep". Today's issues are nothing, compared to back then!
'the Monetary Policy Committee is expecting an unspecified period of rising inflation and slowing growth'
This statement should raise alarm bells for anyone expecting a rate fall.
Rising inflation will mean interest rates at best will have to be left on hold.
And with the credit crunch forcing up interbank lending rates even if interest rates are left on hold by the bank of England lenders are likely to raise rates to cover the fact they are paying more to borrow money on the money markets.
Property did very well for more than one simple reason.
1. By the late 90's it had become relatively cheap after stabilising from the deflationary market at the turn of the decade.For example I had small terraces returning between 15 to 20%pa rental stream when money costs were 6 to 7 %. This occurred first by a price 'crash' followed by stealth depreciation through positive inflation against stagnant absolute prices.
2. Cheap money post 2002 was a big propellant as it came at the 'wrong' time when prices had already increased to 'normal' values in terms of affordability.
3.The stock market crashes of 2000-2002 gave rise to a 'need' in investors to diversify their 'stuff' portfolio to hedge against equities etc.This was also a result of people losing confidence in the financial sector and it's pensions management. Again more people wanted their pension investments to be self managed and property was more what they were looking for. I don't say they are right by the way.Any market that attracts a very large following is going to see it's performance going forward depreciate. Again that's why I sold most of what I held in the last 3 years while there were still plenty of people wanting to buy.
In terms of buy to let what we do not know is how much of that diversification was a long term strategy and thus unlikely to be liquidated in a short term 'poor' market.What we should know is buy to let will shrink in such a market in terms of new sales until the numbers make 'sense' again.Also what we do not know is what will happen in equity markets which does have some consequences for property. Any sizeable fall in equities following on from the last market drop would serve to drive even more people from equities to property for their long term investment needs.
There is a huge gulf across the broad property market in terms of what it will face going forward. The greatest risk is without doubt in the sectors that enjoyed the most fadish popularity in the last cycle. That is clearly the price risk to the preponderance of flats built in city centre locations. Supply and demand in such is considerably out of balance and will take a large hit in capital terms.Most other 'stuff' will be comparatively stagnant although much depends on employment factors remaining sound.
Colin Smith ,you have accurately identified many of the 'real' issues we face.
Firstly, let me say that I don't agree with your comment Robert (Preston) that grown men should weep because of what Mervyn King recently had to say about the future of the financial markets, inflation and the wider economy.
WHY! because the financial whiz kids who run the big investment banks and other corporate financial institutions have known, for years, about the problem of sub-prime lending and yet they still carried on regardless. So why are they bothered now.
Secondly, neither can I understand why everyone is now getting hot under the collar over the size of the sub-prime lending problem.
WHY! because the total guesstimated value of actual sub-prime defaulters is probably quite small compared to the total amount of money sloshing around the money markets.
I believe the real reason why this problem is coming to a head and in such a blaze of glory has more to do with the fact that the super rich whiz kids who run these financial institutions have now lost control of the situation completely, hence the talk of billions or even trillions. More importantly they are now too afraid of the impact this will have on their professional competence and how it will affect the future well being of the businesses under their control. Rather than own up to gross financial mis-management (gross-misconduct as far as I am concerned) these people decided to create a diversion by causing confusion elsewhere in the hope that the truth will become blurred or buried by other events. For them it would be better if goverments are forced to come to their rescue and pick up the pieces.
These people now have a duty to ensure that they keep the financial wheels turning and prevent the wider economy from going into recession.
I am bemused that there are still defenders of the biggest housing bubble in our history.
Typically the house price/earnings ratio has tracked between 3 and 5, some times a little outside these limits but not a lot.
Lenders have kept pumping money into the market without regard to defaults because they rely on turning defaults into CDOs, albeit at the toxic end they still manage very healthy collateral from it, thank you.
Consequently we have house price/earnings ratios floating off to the upper atmosphere at 7 or 8 depending who you listen to.
It is entirely unsustainable, the fraudulent CDO activity bubble has been pricked and we will see the housing market collapse. If we are at 7 or 8 now and go back down to 3 that collapse will be horrendous.
Who will suffer? Hundreds of thousands, if not millions of ordinary folk. Who will get away with it? The fraudulent bankers that pumped up the bubble.
I can't understand why the law has not been more vociferous on the subject.
The housing market???
The debate that started in 2007 and ends in ? the problem with all the facts and figures is I can see no anchor point. This is a great concern as when you try and value an asset you need a point of reference, can anyone help with this? Until you find a value, it's all guess work and when spending hard earned money and investing, you never guess. I think only true investers will profit from these problems, not speculators!
The present hysteria in the financial markets, for me, raises a worrying question.
Is the credit crunch being deliberately blown up out of all proportion simply to divert attention away from the fact that the CEO'S of the large investment banks have been grossly negligent in their running of these organsiations, on a truly global scale and over many years. The sub-prime problem is not confined to the housing market it also applies to the sums of money they supplied for acquisitions and mergers etc at greatly inflated prices.
Having lost control of the situation are these whiz kids now deliberately hyping up the confusion and panic to try and hide their proffessional incompetence simply in order to salvage their reputations so they can walk away with very large payoffs. Whereas they should stand accused of gross misconduct and be dismissed accordingly.
For one of these institutions to suffer losses on the scale we are now seeing is unfortunate but for so many to fail on this scale suggests there has been a high degree of collusion between them.