Wednesday, Jul 29, 2009
Still being strangled by high prices more like
Telegraph: Housing: still being strangled by the credit crunch
Conway argues that the UK is heading down the same route as Japan because of the pesky transmission mechanism meaning that banks horde cash rather than lending it against falling assets like residential property. This really shouldn't be a surprise to anyone least of all the BoE and government who seem stunned that we're replaying the fallout from the Asian Financial Crisis to the letter. Anyway, as a demonstration of how the transmission mechanism is failing, look at the graph and note that Conway says that the Skipton BS has increased its cash holdings tenfold "from just over £150m this time last year to £1.1bn". Skipton has also tried to convince the public that the housing market has bottomed out. What does this all point to? The banks want to lend but no-one wants their money.
19 Comments
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1. george monsoon said...
Good article,
I need to do some homework now and find out exactly what has gone on in Japan. It gets mentioned regularly in these blogs and is often compared to the UK.. i.e. we are going down the same route.
So if this is correct, are we looking at decades of stagnation in the property market?
2. hpwatcher said...
If it's being strangled, why are we seeing rises is house prices?
Though, I do agree that we are at the start of a very long decline in the UK economy as a whole.
3. will said...
hpwatcher
You don't really believe that prices are rising, do you? The lenders will twist the data to make us believe we are at the bottom, but ultimately it is for the consumers to decide when to buy and not the lenders to tell us. Propogada alone will not turn this market.
4. jack c said...
See also www.telegraph.co.uk/finance/personalfinance/investing/5928172/20-ways-to-profit-from-the-recession.html
8. House prices have shown signs of stabilising of late and if you believe that the steepest of the price falls are behind us you might want to consider snapping up a property bargain by buying a repossessed newbuild. A two-bedroom flat bought in Colchester, Essex, which was valued at £246,995 in April 2006 should be worth around £225,000 today, a fall of 9pc, if you followed the official Nationwide House Price Index calculator on the building society's website. In reality that property is worth just £120,000.
5. tyrellcorporation said...
HP watcher. Rises are due to monetary policy having flushed out anyone with cash in the bank coupled with plenty of spin from VIs that now is the time to buy. Also, May/June was very good weather (as opposed to the stuff we're having to endure now!). IMO the housing market has now reverted to dependence on mortgage finance and/or rising incomes - neither of which are going to happen anytime soon.
I see a W shaped outlook with house prices continuing their relentless path downwards starting, well, about now really.
6. uncle tom said...
This is not down to banks hoarding money - I just tried testing the Halifax affordability calculator and found it offering 4.8 x income - far too much IMO. They are also offering LTV's of 90% quite happily.
However the interest rates jump by about 2% for LTV's of less than 25%. That, I think, is the issue that is really deterring the FTB's.
But there is a paradox here - why shy away from borrowers who need a higher LTV, but welcome those who are borrowing too great a multiple of their income?
7. inbreda said...
I agree with tyrell. And I think it will start filtering through into the figures in about 3 to 4 months.
8. mrflibble said...
@5. tyrellcorporation
Totally agree, the next leg down is imminent. The people with access to cash and a desire to get suckered have got suckered. Cannot believe there are many suckers left now, especially since the sellers are pricing like it's 2007.
Guessing Halliwide will show a 0.5% rise this month, a -0.5% next month, then we will be back on track with -1% to -2% monthly falls until we reach sensible prices again. At least I hope so, otherwise this will drag on and on for ten years...
9. tyrellcorporation said...
Agreed although I reckon EAs will soon start pricing lower as turnover dries up. The very last thing they want is a stand-off as that's a sure-fire path to oblivion for them.
I keep thinking of this graph:
http://www.housepricecrash.co.uk/graphs-bubble-lifecycle.php
We're following it to-the-letter at the moment.
10. mark wadsworth said...
Edmund Conway is top man.
But I'd disagree with this:
"The banks want to lend but no-one wants their money."
Surely, the sheeple are still desparate to borrow but the banks don't want to lend? I can't find that sentence in the article so I assume that's your personal summary.
11. paul said...
@mark wadsworth
We keep being told that there are lots of buyers desperate to buy but can't get finance but didn't Angela Knight of the BBA reveal that actually only one in 10 chains falls through because of lack of finance?
The numbers are pretty compelling that its not a lack of mortgage finance but a lack of demand that is depressing the housing market.
12. icarus said...
Whether it's low IRs or recapitalising banks by buying toxic "assets" or QE it all comes down to the government's pushing on a string. The 'transmission mechanism' (investors buying securitised loans or bond markets buying others bonds from banks, which sell the loans/bonds to free up their capital/deposits to make more loans to willing buyers/consumers) is broken.
13. uncle tom said...
At the risk of stating the bleedin' obvious, it is very clear that this is a false dawn, a little up-tick on a downward trend.
There are some suckers jumping in, believing this is the bottom of the market; and some of those suckers are educated professionals.
However the market fundamentals are very clear - too much property priced out of the reach of people who need to be able to afford them.
And if you doubt that calculation, look at the number of transactions - 75% down on the long term average, and more than 50% down in London on the numbers from last year.
You cannot blame the lenders for such a massive decrease in trade. Loans are available, and lending multiples are still very high.
The fact is that the property market was supported by speculators looking for capital growth, who in turn were loaned funds by a banking system that had air-brushed risk pricing out of the system.
The collapse of the housing market can be likened to this tower block:
http://www.newsplayer.com/the-leaning-tower-of-hackney-video
- it's just a matter of finishing the job..
14. Tpbeta said...
Yes Conway's analysis of what happened in Japan is not universally accepted. Many think that the banks were willing to lend but no-one wanted to borrow, but this was concealed because it was in no-one's interests to flag it up. The evidence for that is that foreign banks - unaffected by the asset bubble of the day - didn't enter the Japanese market, as they could have done if there were real demand for loans.
In that context it will be interesting to see how the cash rich Bank of China get on having just entered the UK mortgage market. Their popularity can tell us what's really going on.
15. mark wadsworth said...
Paul, that is a fair point (and I hope that you are right and I am wrong*,) but the one-in-ten figure is meaningless.
If that's ten per cent of double-income couples asking for a low income multiple and low LTV, that's pretty horrific. But if that ten per cent just represents dreamers who want to overpay on a huge income multiple and small deposit, well they shouldn't be borrowing anyway.
* In fact, ideally, borrowers don;t want to borrow and banks don't want to lend either. See e.g. the charts showing that the banks now have hundreds of billions deposited with BoE rather than a few tens of billions as is normally the case.
16. Another_pleb said...
The housing market, like all Ponzi schemes relies on buyers entering at the bottom. This just isn't happening and probably won't start to happen again until after the halfway point to the next housing bubble.
17. sybil13 said...
uncle tom said...
But there is a paradox here - why shy away from borrowers who need a higher LTV, but welcome those who are borrowing too great a multiple of their income?
Sybil reply , probably got a LOT to do with the fact that:
" Ray Boulger, of mortgage broker John Charcol, said the increase in price had been driven by a lack of competition and by new rules under which lenders have to set aside more capital to cover high loan-to-value mortgages. "The cost to the lender of making one 90% LTV loan available can be four or five times the cost of offering a mortgage at 60% LTV," he said. "We're in a situation where the more lending a lender does at 90% the less lending they are able to do overall."
18. uncle tom said...
Thanks for that Sybil,
Looks like the new lending rules have resulted in some unintended consequences.
However, if the lenders are having to take such a defensive position when activity is running at just 25% of its normal level, it would seem reasonable to conclude that any upturn in demand would result in a mortgage drought, and the lenders creating waiting lists for loans (as they did in the late seventies)
At that time, most lenders reserved their mortgage funds for customers who had been saving with them for a year or more.
Lest history repeat itself, I would suggest that those who have yet to enter the market consider opening accounts with one or two building societies..
19. Tpbeta said...
You all might find this audio lecture by Japanese guru Richard Koo instructive. Explains why borrowers don't want to borrow and why they nevertheless keep quiet about the fact.
http://media.csis.org/er/090326_koo.mp3