Trooth

This isn't quite true. Northern Rock ran out of money to lend it did not run out of cash to operate. Mortgage margins are tiny as we have the most sophisticated mortgage martket in the world. But to grow your market share you have to be fleet of foot on the market. Unfortunately for NR no one wanted to lend them money at a return NR wanted to pay. The worst that was likely to happen was a drop in profits. Everyone's savings were perfectly safe. The business model they were operating was not inherently risky (there was never a risk of NR going bust).

The real problem was one financial journalist who did not understand the financial markets talking about "emergency loan" in the context of bailing the bank out when it was to do nothing of the sort. They hadn't even used the "ermergency loan" facility when everyone was screaming. This then got to comics like the Daily Mail who frankly gave up trying to understand the finances and just yelled "FIRE!".

I can grant you that much, but the agents selling the mortgages were (at best) economical with the truth. After the initial fixed interest rate (which could be as little as 6 months to 2 years) a much higher rate cut in. Some monthly repayments were doubled. No wonder people couldn't manage. IF the agents or the banks had done their jobs properly all this would have been explained to the borrower. It wasn't. There doesn't appear to be much ethics involved in that industry. Many innocent and blameless people are without a home AND have tarnished their credit rating.[/quote]
The recent (3 years ago) mortgage regulations are quite clear on the disclosure that a customer must see before they proceed with a mortgage and it covers exactly what you are discussing (a full illustration of the loan - which are largely automated these days at point of sale). There is no evidence that this has not been followed in either NR or even most of the sub-prime lenders.

What has happened in the UK is a growth in something called "self certification" which is basically you, under legal penalty of jail, say that "Yes, this is what i earn" and the lender doesn't actually check it out. This is actually useful - ask any recently self-employed person who cannot produce accounts going back far enough.

However it is also being exploited at the bottom end of the chain. I grant you the sellers are hardly saying "you realise that if you sign up saying that you earn more than you do not only could you go to jail but you clearly won't be able to afford it", but equally some of these people are signing up, knowingly, to mortgage payments that are nearly their entire incomes.

Certainly some innocents will have been duped .... but a great many were happy to take a punt.

This self-cert has really come to screw the Banks in other areas. Thamesmead has a large number of properties that are bought in bulk from developers using self cert mortgages for fictious people and an inflated valuation of the property. Fraudster runs off with the difference between teh cost and the mortgage values. Banks lose money. This will be the reason self cert gets dropped but they will tell you it is to prevent people from overstretching themselves.

The banks are in no way happy about this on any front. Contrary to popular belief a bank does not want your property. It isn't an estate agent. All they are going to do is dump it on an auction and get what they can for it. On a broken deal they might not even break even. Which is a bummer as they are (crudely) on for 100% profit over 25 years.

There are two things coming up that are going to be important, that will almost certainly get misreported though.

There is a large rate shock coming for many borrowers. As you say Glyn there are many people coming to the end of the 2 and 5 year terms and that money was bought (and sold) when rates were at historic lows. They certainly aren't high at the moment but they are signifcantly higher than they were a couple of years ago. Many people didn't borrow recklessly, but they borrowed high. These people will find themselves more squeezed and the press may squeal. (The Daily Mail only recently found out that the rate of Fixed Rates mortgage deals have nothing to do with the Bank of England. Something that has never been the case!).

Posessions in the UK have always been incredibly low (banks simply don't like owning property). However they are going to go up. The numbers are so small (compared to the number of mortgages taken out every year) that any increase manifests itself as tens of percents. So expect to see lots of headlines trumpeting the percent not the real value.

The final one is "interest only mortgages". There are a large number of people who are paying interest only mortgages as the payments are cheaper (compared to repayment) and it enables to them to get going with their new home (you know new kitchen, new bathroom, nice new plasma TV). A large number of these people have not been making their own arrangements for paying off the capital (for obvious reasons). Some of these people need to start addressing that capital now. If they swap to repayment (not a bad option) it will be akin to the rate shock above.

There is also the intriguing scenario of Flexible (i.e. current account linked mortgages) where there are a large number of customers who are not watching where their notional overpayments are going and that are not going on capital reductions which is akin to the interest only issue above.

Oh and it will all be blamed on the evil banks. But in reality "you cannot con an honest man".

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Zinja

Trooth,

Well aticulated. I too was one of those who were exasperated by the misinformation about the NR issue. Speak of spin and trumpeting, these newspapers can convince you to divorce your wife im telling you!

As for the US, i think the Americans should be glade that their current housing woes befell them the way they did now than otherwise. The US housing slump is a self adjustment in response to changes in market conditions. This is good to avoid a buble burst and is easier to manage for an economy such as the US. Infact im impressed by the resilience of the US economy under the circumstances, there are few nations in the world that could pull it out the way the US is doing.

Then comes the UK, i smell disaster written over it. The UK economy is set for a big show down IMO. The housing market is over valued by at least 40% and the media has done a good job to artificially inflate the housing market. Dispite all the hype and political spining the truth is going to catch up with the UK market and people will be caught unawares. Unless something happens to eliminate artificial 'colouring' in the housing market, there is going to be a devastating buble burst. Give it 5 or so years and there will be wailling and mourning on the streets of UK!

Trooth

I have been expecting it for the last 10 years. On reflection it really might never come. There will be some negative equity in the future (it is likely there already is for people on 100% mortgages), but that only effects people who need to sell, a lot of people will be in a negative equity "trap" but actually won't be trapped since they won't be interested in selling.

Property developers may get burned a bit, and we have a massive growth industry in propeorty development at the moment. However they will swap from selling to "buy to let". And it is buy to let that has stopped the price crash that i have been expecting for so long.

House prices are so high many people struggle to get onto the ladder - so they rent, which fuels house prices to be bought to let. It creates it's own market. The only thing that will really cause the amrket to adjust is if banks won't lend at all (unlikely) or if there is suddenly an increase in supply of cheap properties - all proposals for house building are currently less than perceived need.

The only thing i can think of that will change this is more teleworking which would cause an evening out of porpoerty prices across the country (and a drop in the commuter belts).

Zinja

Bingo, thats the thing! You see, the detail underneath is what is worrisome. There has been a boom in the buy to let business recently which has led to property hoarding. This business has been able to sustain its activities because of lower interest rates that have been prevalent in the past years. The foreseable trend now is that rates are only going to go up, the age of low rates is less likely to continue and these buyers to let are already feeling the heat. If you have been following recent events these buyers to let are already beginning to sell their properties NOT buy. Reposessions of flats have been on the increase recently.

Another thing about this buy to let business is it has concealed the real number of avaible properties compared to the population. The media has done a good job in exacerbating the 'housing accommodation' crisis. In the last census there were over 700 000 free homes in E&W. Ever since the buy to let business started booming this number has increased significantly due to property hoarding. Once the housing market takes a down turn these facts are going to surface and the same media which is fueling property prices is going to sound its death knell. There will be an en-masse panic and unlike the US where prices declined controllable by free market adjustments, UK will experience a massive tumble coupled with fact that they are overpriced anywhere. In the event of such a development with the current UK economic structure, i doubt if the UK can pull it off like the US. I think there will be an across the board effect on the UK economy.

glyn

[quote=Zinja;424653]. There will be an en-masse panic and unlike the US where prices declined controllable by free market adjustments, UK will experience a massive tumble coupled with fact that they are overpriced anywhere. In the event of such a development with the current UK economic structure, i doubt if the UK can pull it off like the US. I think there will be an across the board effect on the UK economy.

Where the UK differs from the US is in having a rapidly increasing population due to immigration combined with a shortage of housing land. I can't see the US running out of suitable building plots anytime soon. The sub-prime fiasco was an American creation and the effects are still there ever-present in ways the public doesn't yet realise. The US is closer to fiscal disaster than at any time since the great depression, and should that occur the results will be felt worldwide and we will all be living in 'interesting times'.

__________________
Semper in excretum. Solum profunda variat.

Trooth

Even if rates doubled they would still be relatively low! The thing you are forgetting is that people have to live somewhere. If BTL mortgages start being expensive landlords put their rents up. As long as they can keep them within spitting distance of residential mortgages the market will continue. Remember the landlord has the value of the property and the lending policy requirements of lenders as buffers. I.e. just because you can get a mortgage for the same as your rent doesn't mean someone will lend to you (5 times income etc).

Also possession (i hate the phrase reposessions because whilst accepted it is of course false) has always been very low in the UK and very low for some time. Yes there will be a rise, but the underlying numbers won't, i suspect, grow that alarmingly.

The UK housing market is a lot stronger than the US, in my opinion. As Glyn says there is a lot of immigration, but even without that the market has been in underlying demand for quite some time.

The US market is based on new build. For example there is a concept alien to the UK of the "second hand house". It is alien because a large majority of houses are probably "fifth hand" here. Hence a downturn in the market in the US is exacerbated by the cultural aspect of wanting a new house in a market with lots of people selling existing ones.

I am not sure that describing BTL landlords as hoarding property is right. Currently the market supports a large rental base despite having a far higher owner occupier base than most of Europe. Also the underlying trend for house price inflation has been downwards since the second world war.

For the BTL properties to cause downward pressure on house prices they would have to be mostly unoccupied at present and then released onto the market. I don't think a large proportion are unoccupied If they are occupied, even if they are sold to residential buyers that means the existing tennants have to find somewhere to live which balances out the downward pressure.

Zinja

Really? Doubling of the rate would be way over the Bank of England target and require them to make an explanation to the Chancelor! You can bet if the interest rates doubled there would be pandemonium in the 'city'.

Your premise is based on the current market conditions prevailing where the landlord has the upper hand over tenants. A situation where BTL mortgages are expensive will put landlords on their backfoot. Tenants will have bargaining power over landlords because the landlord urgently needs the tenant (to cover the mortgage) more than the tenant needs the landlord. This is the normal trend whenever market take a turn. The only option will be to sell under pressure and with less bargaining power. In the same way that sellers are holding buyers at ransom at the moment, buyers and tenants will be calling the shots. Look what is happening now in the US, landlords and sellers are literally paying the expenses for buyers just to lure them so that they can repay their mortgages. The landlords have no chance raising rents.

Experts seem to say otherwise. Yes, there has been low reposessions(excuse me for using the term because the country has been experiencing a period of reletively low interest rates. Should that come to an end (as experts predict) you can bet it will be mayhem everywhere and reposessions will be the order of the day. What makes the UK housing market particularly vulnerable to this is the fact you have mentioned yourself; people have taken mortgages which are 3, 4, 5 times their salaries. It will be impossible to hold on to such properties once the climate has changed.

It is stronger than the US because it is artificially enhanced, which is the point im trying to make here. This very pride of UK housing market will be its downfall when these artificials are exposed.

Whilst i agree that there has been an increase in immigration but im very skeptical at the hype accorded to this issue. There is a 'blame everything on the migrant' colusion here which the politicians have hijacked for their selfish ends. This is the same hype which has been used to inflat house prices as well. The population in E&W at the moment is about 54M. There are about 25M households in E&W with an average ocupancy of about 2.3/household. This gives a household population of ~ 57M against the actual population of 54M. This is not to count the vast numbers of other acommodations out there eg bedseats, group accommodations etc. Yet despite all this families are crammed in unfit accommodations and it is said there is an accommodation crisis. So where are the 3M+ households vanished to?

Immigration is only accounted for coming in and there is no count on the outward going migration, only now has the government put such a mechanism in place. People are not told that recent surveys of the maligned Polish 'block' migrants are actually not staying but constantly going in and out the UK, one has to dig to get that kind of info.

I could go on and on but my point is this whole house market structure in the UK is based on artificials which IMO, will be exposed once there is market shake up and consequences will be dire.

It may have the highest owner ocupier rate but that is different to saying there is a crisis in the country which is what the media wants people to believe. Otherwise can someone explain where the 3M+ households are? You see where i think there is hoarding going on here which is exercerbate the situation and causing house inflation?

If may seem so when you average them over such a protracted period of time. Put that into context and say consider just the last 10 years and you will see that there has been a phenominal rise in house inflation. Experts say they are 40% inflated, now i wouldn't call that a downward trend.

Thats the crux of the matter. How many households out there are being hoarded? How many 'for sale' or 'to let' signs are in your block alone?

Feanor

pfft. Capitalism. Go have a revolution, nationalize the banks, set the housing prices at reasonable levels, re-organize society to interact harmoniously and you will deal with the root problem. Or just put another band aid on it.

Trooth

The BofE doesn't have a rate target, it has an inflation target. The rate can change as and when. Doubling would put the BofE rate at 11.5%. This is hardly a historic high.

The city would go less loppy than the press - I would predict the Daily Mail would go mental - but then it doesn't understand (see Northern Rock penny a share headline).

However if it did happen tomorrow. It wouldn't effect a single person on a fixed rate (something the Daily Mail has also demonstrated it doesn't understand).

Would it? You are assuming that all landlords are mortgaged to the hilt and have only just purchased their properties. A huge number have seen a huge (in some cases 100%) increase in the value of their property since purchase and have had years of paying off their mortgage already. Hence yes, they would see a downturn in their net income, but not a cataclysm you are describing.

The US is a pretty unsophisticated mortgage market from the consumer's perspective. The market is structured from the Banks' perspective. This is because the Banks in the US are expert at the securitisation of mortgage books to recover capital.

This is the reason sub-prime has hit the US market so badly. The US banks are dependant on being able to re-cycle their capital by selling off bundles of loans to long term investors (either directly through managed services or through a bond issue). The sub-prime defaults in the US have made mortgage secured bonds (and direct ownership of such loan books) unappealing to the investment market so they are putting their money elsewhere. This is squeezing the US banks at both ends because they are faced with rising defaults (almost inevitable because of who they are lending to) and not being able to recover capital quickly (no one wants to buy the loans off them). So they are taking the upfront profit hits and finding it difficult to raise more money to lend.

The UK mortgage market is much more sophisticated than the US form the consumer's perspective. However because of this (and because it isn't by default underwritten by government funds) securitisation has always been harder. It is much more difficult to price a bond on a UK mortgage book than a US one because the mortgages are more complicated and the rates of return vary over the life of the mortgage. That is not to say UK banks don't securitise their mortgage book - they do but they are less dependant on the process for capital. Hence investors shying away from mortgage secured investments is less important.

You mean other experts I have some professional experience in this area.

The analysts that made their "interest rates could double by the end of the year prediction" made them in the summer. The market has changed dramatically since then. The pound is very much stronger - perhaps too strong - and raising interest rates would only strengthen it. It is extremely unlikely in my opinion that we will actually see much interest rate change before the end of the year unless the pound weakens substantially. Certainly even if we do see an increase, it won't be massive.

Well that doesn't make the UK market particularly vulnerable. All mortgages markets are on income multipliers. Remember even 5 x income is over the life of the mortgage and it is a statistical guide. People fretted when it went from 3x to 4x times but there were no major adverse effects. Not that long ago it was seen as too conservative by even responsible lenders.

Your figures are too imprecise to make the conclusion you are trying to. There aren't 3m households missing from your figures. That would be 3m people and at the crude average of 2.3 that would be 1.3m households.

Of course the pressure on housing is not solely caused by immigrants. There are a great many factors. Least of all being that your average of 2.3 is part of the clue - those ".3" people are becoming adults are trying to find homes of their own. Also there isn't actually a housing crisis across the nation. There are localised housing problems in the growth cities and the traditional commuter corridors.

True, however the housing flow caused by emigration is not one (or even 2) for one. That is when an emigrant (often two) leaves the UK they often keep their property here.

Well people have been saying it for at least 15 years and at some point there will be a correction. I dispute it will be dire. Absolutely some people will lose their homes,a dnthat number will be higher than now (it woudn't correct if they didn't), however as i say (re - if you must!)posessions are a tiny fraction of mortgage lending in the UK.

I don't see what you mean by hoarding. There is an increase in the number of people in the UK owning more than one property, and often they do not rent the second property out. However i think that is different to hoarding. Hoarding implies a collective will to restrict demand and i doubt this is the case because someone is having to shoulder the cost of that.

No matter how much they are inflated, if you look at the post war figures there have been corrections but the overall trend is down. This has been caused by an increase in mortgage lending and loosening on credit controls. Thus allowing more people to buy and thus making selling easier.

Zinja

I will attempt to respond this one last time, if you still can't agree with me then we will have to agree to disagree and im done with this topic.

It's either you are playing semantics or you are just being technical. By rate i meant inflation rate. Inflation is a measurement over a unit time so, yes, it is a rate.

If that happened you cab bet the incumbent gvt can waive goodbye to being in power. 11.5% is high by any standards. History is irrelevant.

"...they would see a downturn in their net income.." that would be the reason for them to sell. They are in it for a constant profit not positive net present values (im assuming you understand these terms since you indicated that you are in the finance field).

Maybe you and i should get together some time and form our own bust-proof company . (My profession is not exactly mortgaging but i do brush with such issues a lot)

Im not talking about 'summer' or 'end of year' scenario, im talking about foreseable future periods (+or- 5yrs). And it is not the strength of the pound that is the issue here.

Oooops! Sorry, misstatement on my part.

Thats my point. The media and the politicians ain't making such a good job clarifying that to the public. They make it sound like in 20 years time the UK will either be reclaiming land from the sea or people will be living in boat houses!

When properties lie empty or having been on the 'for sale' for ages dispite the fact that properties are in such demand. (I know properties that have either been on sell to let for over 2years now)

Trooth

Ooooh!

When you said rate target i assumed you meant interest rate. However as you have clarified then patently the BofE is likely to hit is inflation rate target or at least not miss it by much.

I think a government would struggle to survive that. However the Tories did when they last suffered something similar and that was when the BofE was an overt poltiical tool. We can argue about it being a covert political tool at the moment but it's independance would mean that in theory it was not the government's fault. As to whether they could ride the sentiment, well history says governments can survive such things. Either way the means of preventing it is, largely, the BofE repo rate unless extra taxation is added to slow inflation (which would cause a double whammy and an exit for the government).

Yes and no. Some would sell immediately. Some would start buying more property as the market dipped offsetting their downturn with a greater asset base (i.e their pensions).

Hee hee. Now there is an idea.

Implicitly though you are about summer or end of year if you make refernece to experts predictions. It is impossible to foresee 5 years in advance. Again from Black Wednesday the situation was very different five years later (rates had halved).

And the strength of the pound is very much part of it. The main tool the BofE has for controlling inflation is the Repo rate. However if they increase it, to dampen inflation, they risk a further rise in the pound. This is the reason the BofE has been hinting at rate reductions next year, it is trying to get some of the longer players out of the pound to give it some wiggle room.
Indeed, according to the media I am about to die. If i don't die of a muslim terrorist's actions tomorrow, i will contract bird flu or my heart will give out if i eat a burger. If i don't die from one of those things i will be working until i am 90 and poor with it. The media is all about shock value. Hence there is a housing "crisis". Just as the the Daily Send-the-all-back (Mail) and the Diana Express constantly flip between the McCann's being saints or evil, they also constantly flip from "we have never had it so good 'cos our houses are worth loads and always will be" to "PANIC! Houses to be given away with cornflakes packets by Christmas".

Yes, but equally they could have a brown corner bath for all we know!

Julie

PORT WASHINGTON, N.Y. (MarketWatch) -- Whether the Federal Reserve realizes it or not, the United States economy is reeling from a one-two punch of plunging real estate values and a full-blown credit crunch that might not be alleviated with additional rate cuts.

While the Fed might have had a role in creating what has come to be known as the subprime mess, because of the way it has evolved, the Fed's ability to deal with it is rather limited. There are a number of reasons for this.

First and foremost is the fact that, on the real estate side, the damage has already been done.

Because short-term interest rates today are well above the 45-year lows plumbed from the middle of 2003 through mid-2004, those mortgages with adjustable rates have -- or will -- reset to much higher rates even if the Fed decides to lower rates by a quarter of a point or even more.

As a consequence, there will likely be more delinquencies and foreclosures, which, besides causing pain for those homeowners, will result in more homes on the market, thereby depressing their prices.

In turn, this will affect other homeowners -- even those with fixed rate mortgages and who and are current with their payments. They will likely be unable to use their homes as ATMs, tapping the equity to supplement their incomes.

They can't turn to savings, either, since, collectively, the nation's homeowners have been spending more than they have been earning for the past two years. The last time this happened was at the bottom of the Great Depression.

This alone is why consumers are reducing their outlays on all kinds of goods and services -- luxuries and necessities alike. Indeed, you know there's a problem out there when Starbucks reports a decline in traffic in response to --among other reasons -- a 9 cent hike in the price of a cup of coffee.

Another reason why the Fed alone will not be able to ameliorate this crisis is that its main jurisdiction is over the banks -- and the problem is now centered in the financial markets. This is because the banks no longer have these loans on their books, having turned them into securities and sold them to others.

In turn, these mortgage-backed securities were used as collateral for the issuance of debt, whose value, as you know, is far lower than originally thought.

This has caused massive write downs by holders of these securities, cutting into their profits -- but, more important, depleting confidence in the financial system. And this reduction in confidence is spreading beyond the financial markets and residential real estate to commercial real estate as well.

To the extent the banks are involved (by holding on to some of these securities), their capital is being reduced and thus their ability to make new loans.

I need not remind you that the ability to borrow money is the lifeblood of not just business --but consumers, too.

Not surprisingly, the combination of lower real estate values and reduced availability of funding is beginning to reduce business spending on new plants and equipment. This is overwhelming the positive effect that the lower-valued dollar is having on our exports.

So while the Fed is preoccupied with communications and forecasting, the financial markets remain frozen while the economy is melting down.

Talk about fiddling while Rome burns.

The U.S. economy is melting down - MarketWatch