Wednesday, Aug 08, 2007
It could never happen here right?
Bloomberg: U.K.'s Subprime Crisis May Be Worse Than U.S.'s
We are now all familiar with the damage that can be done to financial markets by a subprime lending crisis
Posted by mrmickey @ 12:17 PM (111 views) Add Comment
11 Comments
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1. Davros said...
Sacrilige!
2. sovietuk said...
This will most probably be the case. With hindsight it doesn't take a degree in economics to realise that a population exposing themselves to massive debt in an era of benign economic editions are basically signing their own financial death warrant for when the weather turns. Obvious really.
3. japanese uncle said...
The average British home already costs 11 times the average local salary,
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This is a rather pricise criterion of what will be in store for this market.
4/11=36.3% assuming 4 times annual income is the reasonable size of mortgage, though it might well be 3 or 3.5, UK properties are
100-36.3=63.7% overvalued.
So your flat valued 200,000 now is actually worth 72,600 pounds. Quite convincing data, isn't it?
4. captain sensible said...
'If you are in trouble with your mortgage, you can't pay it off by selling. There is little incentive to keep up the payments. Why not just walk away, and hand the keys and the problems over to the mortgage company?'
An interesting antidote to the hype and optimism except, possibly, for the final point (above - not sure how tongue-in-cheek it is intended to be). A common folk myth in the UK is that by handing the property back you walk away from the problem. In reality, the borrower remains liable for any shortfall once the property is sold and repo costs paid. If the banks are as exposed as articles of this type suggest, they are likely to pull out all the stops to recoup their losses. We are likely to see defaulters, in addition to being homeless, made bankrupt and anyone who has lied on a mortgage application (eg a BTL investor who has taken out an occupier mortgage) prosecuted for mortgage fraud - anything, in essence, to strengthen the banks' position. If I was struggling with my mortgage debt and facing homelessness, bankruptcy and a criminal record (and possibly a bit of prison time) I'd be looking to sell up right now!
5. dohousescrashinthewoods said...
Beautiful, JU, a simple objective measure of the likely value of housing relative to current levels.
A breath of fresh air as compared to spotty teenage slaves from Foxtons "feeling" a number and pumping it up.
If we say avg house @ 200k = 10x avg salary, then between 3 and 4 times is between 60K and 80K
Remember that barely a year ago we were still shocked about banks lending 4x salary and questioning the sustainability of such a move. should we say 60-70K is true average value then? Blimey.
So all those snobby flat-flippers who think they are making a killing by picking up new buids for a "mere" 150K, i.e. 50K below "market value" of 200K are in fact paying double the price. Eyewatering stuff.
6. tyrellcorporation said...
My various friends flats that they bought for £30k in about 1998 are now £100k+ (this fits nicely with JUs 63.7% overvalued). Their wages have stayed the same so we can conclude that cheap credit lines have made up the difference. That cheap credit has now all but dried up and the winds of change are quickly blowing away the foundations of those price rises.
The property bulls dream of a Goldilocks scenario of gently rising prices from now on - I just can't see how that can happen.
7. dohousescrashinthewoods said...
Exactly, Trell.
When iterest rates fall, asset prices rise. When interest rates rise, asset prices fall.
I have sold what assets I have control over and decided to hold cash to see where we are at the start of 2008.
8. mrmickey said...
All along the rise in houseprices has not come from economic growth or wage inflation ergo it has to come from banks lending out larger and larger sums of money to folks who's source of income to pay the debt back is stagnating.
9. Swisstony said...
I have escaped the madness and moved to Switzerland. I have purchased here where they refuse to lend to you unless you have a 20% mortgage and provided that mortgage payments do not breach 1/3rd of your net income.
Seems sensible, but such critera for lending went out of the window in the UK many years ago. People still seem to think that their ex-council semi will be worth the GDP of Brazil with no fundamental understanding of economics.
The early signs of the problems are there. I monitor a UK property auction site. 3 years ago every property would sell and sell for well above the guide price. Now there are more properties at the auctions and are only just selling at guide price. These are the early stages. It is going to be highly amusing watching from afar.
10. Planning4acrash said...
dotwoods, average properties were 70k in 1996 and 90k in 1999. Considering that there was a bit of a bubble back in 2000, I see no reason why prices should not go below 90k to pre 1999 levels. Why not? If mortgage lending dries up, there will be no choice. It would be great, because I could finally buy a whole house, not just a studio flat!
11. planning4acrash said...
Dot-House, house prices were last 70k in 1996 and 90k in 1999. They shouldn't be more than about 130k now, had they had followed the historic trajectory, so I see no reason why they should not crash and undershoot to pre 1999 prices. I doubt they will go as low as 70k tho. That would require a massive level of debt destruction.
http://www.housepricecrash.co.uk/graphs-average-house-price.php