So why isn't this possible?

Graham_Devon

Really2 wrote: »

Well you did ask as you had problems understanding both, next time I wont bother.

I fail to see what you want out of this conversation you ask for explanation and when given you moan about it being off topic.

Hey, don't get all offended. I was just talking about predicitons now. Todays figures. You then came and told me however how my predicitons worked, they were nominal and I disagreed.

I'm not having a go, it's just all your explanations of how I'm using the wrong scale have not fitted with how I'm using the scale....now, your saying stuff about 15 years time.

Bulls and bears will never ever agree if predicitons today are based on mathmatical "maybes" based on a point in 15 years time.

sleepyj

The difference is Japan had a large profitable manufacturing base at the time. We have absolutely nothing to get us out of trouble.

To the person who said it won't be worth sticking around if we see 40% falls, it's quite the opposite. People won't be sticking around if there aren't 40% falls because given the wage deflation spiral we're currently experience the UK's housing stock will simply be too expensive.

Really2

Graham_Devon wrote: »

Hey, don't get all offended. I was just talking about predicitons now. Todays figures. You then came and told me however how my predicitons worked, they were nominal and I disagreed.

I'm not having a go, it's just all your explanations of how I'm using the wrong scale have not fitted with how I'm using the scale....now, your saying stuff about 15 years time.

Bulls and bears will never ever agree if predicitons today are based on mathmatical "maybes" based on a point in 15 years time.

You said were confused and were thinking of prices not including inflation. I said that was nominal and that is true.

Graham_Devon wrote: »

Its not that involved.

It's a simple case of people seeing the average house price at 200k, and predicting 30,40,50% falls when the bottom hits.

So houses would be 110k / 130k.

Its that simple, and thats based on real house prices.

Graham_Devon wrote: »

Am I getting myself confused again?

How can Dan say based on nominal figures houses only crashed 20% in the 90's then.

Whatever it is, nominal, real etc, I'm not counting in inflation / wages, or anything like that. I am very simply looking at the peak figure and where I think the bottom figure will be, and then looking at the percentage difference.

THAT IS NOMINAL

I am sorry if it does not fit in but I will not lie to you.
A drop from £x to £x is nominal,

i think you have confused yourself on what to use and think that "nominal2 is "real" and visa versa.

Nominal falls have always looked less than real ones, but they are the only cash in your pocket falls. "real" is realized after time that is why you think prices actualy fell 50% in the 90s but they never actualy did on paper.

Thrugelmir

kennyboy66 wrote: »

Its a seductive argument but has a number of flaws.

1) It effectively assumes that all 15 properties are bought at the top of the market.
2) The average portfolio is significantly less than 15 properties
3) Most BTL properties will have additional security on the owners main property.
4) Total borrowing on BTL properties is roughly £120bn - even if every single property in the country was valued at zero, that is still the total exposure that the banks have to BTL property.

I was merely trying to explain the reason why the banks have exposure to BTL investment and why losses are ikely to be incurred.

In answer to your points

(a) BTL investors were the market. As they pushed up prices by bidding against each other.
(b) Does the number matter? As in (D) below the market is far bigger.
(c) This only mitigates part of the loss.
(d) No it isn't. Include lending on a commercial basis not just pure mortgages. This isn't classified as a mortgage so doesn't get picked up by the CML.


I'm always open to alternative views and explanations. So would be interested in your view as to why banks will not incur losses on residential property lending. Both consumer and commercial.

Thrugelmir

kennyboy66 wrote: »

Total borrowing on BTL properties is roughly £120bn - even if every single property in the country was valued at zero, that is still the total exposure that the banks have to BTL property.

Then you failed to understand my post. I tried my best to make the example as simple as possible. But obviously failed.

kennyboy66_2

Thrugelmir wrote: »

I'm always open to alternative views and explanations. So would be interested in your view as to why banks will not incur losses on residential property lending. Both consumer and commercial.

Where did I say that ?

I would expect there to be losses in both residential and buy to let.
I would expect buy to let losses to be a signicantly bigger percentage than owner occupied.
I would expect losses on residential loans to be no more than 4.5% and on BTL loans to be no more than 8%.

Even the most pessemistic figures suggest at most 75,000 respossesions in 2009.
Lets say £150k per borrower.
Thats only £5.5 bn even if we assume that a firesale of houses gets only 50% of its peak value.

RBS, HBOS, Lloyds all stated that the majority of their write offs and provisions have so far arose in their commercial lending book.
What makes you think they are wrong ?

andykn

Thrugelmir wrote: »

How the banks, lets say HBOS in this example are going to end up losing vast sums of money. I believe that you are thinking that banks will only lose small amounts as individual householders default. The issue is far greater than that.

The figures I'm going to use aren't reflective of anything other than to give an examaple.

Mr Joe Public uses £30k towards buying a £150k BTL property. Rental income covers mortgage cost.

This property rises in value by £30k. Mr JP remortgages and releases the £30k.

Uses this to buy property 2 for £150k.

As value of property 1 and 2 increases. Releases equity to add further property. And so on and so on.

In the end builds a portfolio of 15 houses. All on an initial capital base of £30k.

All the mortgages are interest only. So has total mortgage debt of £2.2 million.

Property prices slump 25%. MR Jp defaults. HBOS looses £550,000.

But the bank hasn't lost £550,000 , they've lost far more. As they securitised MR JP's mortgages and sold 40% on to raise an additional capital.

On the mortgage book of £2.2 million. The bank has leveraged up 40% = £880k. Selling on £880k of securised product to another bank.

So the HBOS's total exposure is actually £3,080,000.

The properties realise £1,650,000.

The actual write off to the bank is £1,430,000. :eek:


This is where the problem lies.

Or to put it another way.

HBOS lends 2.2 million and securitises 40% of that (880k) leaving them exposed to the tune of 1.32 million.

JP defaults, property is sold at a 25% loss (550k), HBOS lose 330k, buyer of security loses 220k.

Thrugelmir

kennyboy66 wrote: »

Where did I say that ?

I would expect there to be losses in both residential and buy to let.
I would expect buy to let losses to be a signicantly bigger percentage than owner occupied.
I would expect losses on residential loans to be no more than 4.5% and on BTL loans to be no more than 8%.

Even the most pessemistic figures suggest at most 75,000 respossesions in 2009.
Lets say £150k per borrower.
Thats only £5.5 bn even if we assume that a firesale of houses gets only 50% of its peak value.

RBS, HBOS, Lloyds all stated that the majority of their write offs and provisions have so far arose in their commercial lending book.
What makes you think they are wrong ?

RBS and Lloyds are moving £600 billion of toxic debt into the Governments insurance scheme. The loss on this debt cannot be ascertained until the years pass and realisations take place. In effect capital repayments are made on long term debt such as mortgages and secured loans. Banks lent "commercially" to people acquiring residential property.

If you don't believe the amount lent by banks for property. Here's a quote "The new Chief Executive of RBS, Mr Hester pointed out that property rose from 18 per cent of bank lending to 40 per cent of lending ten years later and said that banks have to reduce property lending as a proportion of their total lending. But, he said, that process will take years".

Numbers of repossessions are only part of a more complex jigsaw. Yes there's the mortgage to be repaid. But also there's the secured debt consolidation loans to be repaid as well. As people converted unsecured debt ( credit cards) into secured debt against their only asset (property). So the actual writeoffs are far higher than just the negative equity bewtween mortgage and house value.

Secondly "repossessions" of BTL properties result in an appointment of a receiver of rent. The tenant staying in situ whilst the property is sold on. These houses do not appear on CML statistics as reposssesions.

Receivers of rent were appointed 2,400 times in Qtr 1 2009. Compared to 1,800 in Qtr 4 2008 and only 100 in Qtr 1 2008.

Be interesting to see if this trend continues when Qtr 2 figures are published.

To put the BTL property market into perspective . In 1999 there were only around 30,000 mortgages in existance. Now there are 1.1 million plus other "normal" mortgages where people have obtained consent from their lenders to rent their property. This won't be classified as BTL in official figures.
Of these million or so new BTL mortgages.

Around 200,000 were granted at the peak of the market in 2007. (Based on a report by Hargreaves Lansdown in August 2008). So that's translated into considerable losses for many.

The whole issue is very complex. It will take time for a clear picture to emerage. Thats why I'm negative on property as an investment. As the fundamental issue is the debt overhang. That will take many years to clear.

There could be 800,000 BTL mortgages who are now close to having none or negative equity. No sign of capital gain for the foreseeable future. Interest rates could tip them over the edge.

A lot of property will come up for sale. Result in the same way that the property market was built, it will fall. This time BTL investors will race to sell first to cut their losses.

Interesting that around 46% of BTL investors in 2007 saw property being their pension scheme. A painful lesson has been learnt.

Really2

Thrugelmir wrote: »

Interesting that around 46% of BTL investors in 2007 saw property being their pension scheme. A painful lesson has been learnt.

Surely that is the same for any asset for a pension. The average pension fund as most probably dropped more than house prices due to the economic climate.

Thrugelmir

Really2 wrote: »

Surely that is the same for any asset for a pension. The average pension fund as most probably dropped more than house prices due to the economic climate.

Pension funds gain from tax relief on contributions. So a high percentage of fund reduction has in effect been absorbed by that.