House price crash?

EdInvestor

Gorgeous_George wrote: »

The point that I was making was that each lender will score their mortgage applications using a risk model. A BTL application from a wannabe LL with equity in his/her home will score higher than a FTBer with little or no credit history. Financially astute BTL LLs will earn a larger share of the limited funds available. Those who score less well will be locked into the rental market until their credit score improves.

It's interesting to note that the number of mortgages lent to BTL investors has just passed the number of FTB mortgages for the first time.

alan44

Generali wrote: »

We'll see.

Personally, I suspect that demand is about to get sucked around the U-bend marked credit crunch as people find it increasingly tough to borrow unless they have a large amount of equity, good solid income and an excellent credit rating. So I think you're wrong. In fact I think this is already happening as shown by the shrinking number of sales.

We'll see what happens to auction prices in the spring. They should show what's really happening to the market as a large proportion of sellers are either forced or highly motivated. My guess is that auction prices realised will be shown to be substantially below what's going through estate agents.

It does depend a lot on the credit crunch, but so far there haven't been any major problems in the UK. For example RBS wrote down a whacking 1.5billion, but still made record profits of 10.5b. Not nice, but not the end of the world.

The main problem at the moment is libor, and banks worrying about each other's problems (according to the bank of England). One this year's accounts come out, it may settle down if there are no major surprises.

Don't forget that these institutions want to lend money to people who can pay it back. If they don't, they lose value and top people eventually lose their jobs.

Paragon, for example, have secured new funding and are now basically insured against credit crunch problems, or so they say. They have removed some of their more risky products, but are still happily lending away.

There are definitely things that can go wrong in 2008, but so far nothing that will definitely manifest itself.

Turnbull2000

EdInvestor wrote: »

It's interesting to note that the number of mortgages lent to BTL investors has just passed the number of FTB mortgages for the first time.

You'd think that would set off political alarm bells wouldn't you. But with there very own property investments to preserve, it looks like they'll remain silent. Protecting the interests of young families my ar*e. I hope this country gets what it deserves - a good brutal recession.

Rick62

The property bubble has, to a large degree, been fueled by reckless lending, lending too much, high LTV's and highly geared banks (eg Northern Rock were lending over £100 billion on a shareholder base of £2 billion).

As they become more cautious, restricting LTVs, charging greater premiums (particularly for sub prime), doing more income verifications, reducing their gearing, then the availability of funds will, and currently are, reducing resulting in prices falling. This is in addition to buyers sentiment.

If buyers expect prices to rise by 10% plus/year then they will be happy to pay top prices, if buyers expect little or no increase, or even a fall then buyers will be more aware of affordability and will also restrict how much they borrow.

These two factors combined, banks and borrowers both being more cautious (and interest rates being higher) will combine to bring prices down, and potentially much more and quicker than all the analysts models indicate.

geoffky

Crisis may make 1929 look a 'walk in the park'


Last Updated: 11:21pm GMT 29/12/2007
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As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues that things risk spiralling out of their control
Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.
Read more from Ambrose Evans-Pritchard
Is the crisis getting worse? Get the latest comment
The financial outlook in 2008: Experts' predictions
As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.
Faces of power: The Fed’s Ben Bernanke, the BoE’s Mervyn King, the ECB’s Jean-Claude Trichet

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.
Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.
York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.
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"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.
"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.
The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.
New York's Federal Reserve chief Tim Geithner echoed the words, warning of an "adverse self-reinforcing dynamic", banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.
Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.
Yet still the central banks shrink from seriously grasping the rate-cut nettle. Understandably so. They are caught between the Scylla of the debt crunch and the Charybdis of inflation. It is not yet certain which is the more powerful force.
America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.
This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

Gorgeous_George

Rick62 wrote: »

...These two factors combined, banks and borrowers both being more cautious (and interest rates being higher) will combine to bring prices down, and potentially much more and quicker than all the analysts models indicate.

You may be right in general but IRs are falling (possibly unwisely).

GG

Generali

TBH I reckon this 1929 stuff is a little alarmist to say the least but there are definite parallels with Japan in the late 80s. Without the cross-holdings of equity across banks but clearly there is counterparty risk that is widespread (and possibly unquantified) in derrivatives holdings.

Rick62

Gorgeous_George wrote: »

You may be right in general but IRs are falling (possibly unwisely).

GG

Base rates may be falling recently (from 5.75% to 5.5%) however I've seen a lot of people recently coming off 2 year Fixed rates of 4.29% to 4.49% and are now going onto about 5.5% to 6.0%, increases of about 30%

TTMCMschine

When the money supply increases, so do asset prices. When the money supply contracts, so do asset prices. We've had a massive money supply expansion, the "credit crunch" is the contraction.

Worse still is that when a bank issues mortgages, they bundle them together into a security & sell them as a financial instrument. If no one wants to buy them then the banks won't issue the mortgages (unless you have a very large deposit) because they don't want to end up being stuck with the risk themselves, & also they can only loan a finite amount of money - which another reason that they sell them as bundles, generally to pension companies & the like.

Those mortgage securities have largely been reclassified from AAA to junk status (ie very safe to worthless) & companies like Bear Stearns in the US have lost Hundreds of Millions of Dollars - & theres still more to come. Fannie MAy, Freddie Mac, Northern Rock,etc are all being kept afloat by the central banks, but will almost certainly go bust.

Who wants to buy those securities now?

Then theres credit card debt that is securitised in the same way & that hasn't even started yet.

Doesn't bode well for the housing or stock market in my opinion, nor the general economy, jobs market, inflation/deflation/stagflation - a depression is a very real possibility.

TTMCMschine

PS - look at the DOW today - a sign of things to come I suspect.