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Get Ready For Double Dip In U.k. Property Prices (bloomberg Article)

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Good article from Bloomberg. I think it just about sums it up, and it makes complete sense from my point of view...

http://www.bloomberg.com/apps/news?pid=new...id=aMZKhYu7X_vU

Sept. 8 (Bloomberg) -- It doesn’t take much to get the British excited about house prices again. As the European fall approaches, there are signs that the market is bottoming out. It may even be rising again.

Does that mean the slump is over? Not at all. Expect a double dip in home values.

True, there are grounds for optimism. The Bank of England is printing money furiously, and the economy isn’t contracting the way it was at the start of the year. Against that, any increase in interest rates will hit the market hard, the banks are intent on restoring their balance sheets at the expense of mortgage holders, and the U.K. economy is losing jobs. All that means one thing: House prices have further to fall.

Right now, there are clear signs of recovery.

Property-research company Hometrack Ltd. said last month the average price of a home in England and Wales rose for the first time in two years. Other surveys have painted much the same picture. Nationwide Building Society said house prices in August increased 1.6 percent. That was the fourth consecutive monthly gain and the biggest since 2006.

In London, luxury-home values have been rising for five straight months, according to real estate agency Knight Frank LLP. Since it is London that often leads the whole market, such a development can only be another positive sign.

There may be more positive signals down the track. The Bank of England said last week mortgage approvals rose to their highest level in 15 months in July. If there is more money being loaned, that can only strengthen the market further.

Safe to Buy?

So it looks like the collapse in confidence in the housing market -- which has knocked 20 percent off house prices since the decade-long boom peaked in August 2007 -- is now over. It’s safe to buy a house again, right?

Not quite. There are good reasons to expect a second dip in the market later this year or early in 2010.

First, the benchmark interest rate is still at record lows of just 0.5 percent. Most people can still manage to at least pay the interest on their mortgages -- and so long as you can pay the interest, the property usually won’t be repossessed. At some point, interest rates will have to rise again. Once they do, many people will be in trouble. We can expect to see a lot more repossessions. And many of those properties will be back on the market at bargain prices, pushing prices down again.

Widening Spreads

Second, banks are repairing their balance sheets at the expense of mortgage holders. The spread between what the banks pay depositors and what lenders charge for loans is widening. According to Moneyfacts Plc, the margin on two-year money is the widest it has ever been. That may be good news for banks and their shareholders. Competition has been reduced, and it is easier for them to charge higher prices. But it is bad news for mortgage borrowers, the people who go out and buy houses.

Third, a lot of lending has been taken out of the market and isn’t coming back. According to CreditSights Inc., almost 300 billion pounds ($492 billion) of U.K. mortgage debt was securitized and sold to the bond markets from 2005 to 2007.

“That represents more than 90 percent of the growth in mortgage debt over that period,†it said. The world isn’t exactly clamoring for British securitized mortgages anymore, and won’t be for a long time. With less money coming into the market, there won’t be the same kind of demand for houses.

‘Socially Useless’

Fourth, for reasons that a psychologist could better explain, the British are attacking the financial-services industry, even though it is the biggest branch of the economy. The chairman of the U.K.’s Financial Services Authority, Adair Turner, even proposed a tax on financial transactions to help limit the size of the industry. He described parts of banking as “socially useless.†With that sort of attitude, it won’t be surprising if many foreign bankers go elsewhere, withdrawing their support from the housing market.

Finally, the U.K. economy is set for a decade of slow growth. Unemployment rose to the highest level in 14 years during the second quarter. Monetary expansion and government spending are tempering the decline somewhat, but the fiscal stimulus will have to end soon, and the big tax increases needed to bring the deficit under control will keep demand subdued for years. There is still a lot of pain ahead and house prices can’t grow much faster than the overall economy.

Don’t be fooled by the slight recovery in house prices over a few months. Markets always stabilize for a period, both on the way up and on the way down. It is just a pause for breath -- and the second dip in the crash is just around the corner.

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Finally, the U.K. economy is set for a decade of slow growth

Euphemism?

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And my little selection:

Third, a lot of lending has been taken out of the market and isn’t coming back. According to CreditSights Inc., almost 300 billion pounds ($492 billion) of U.K. mortgage debt was securitized and sold to the bond markets from 2005 to 2007.

“That represents more than 90 percent of the growth in mortgage debt over that period,†it said. The world isn’t exactly clamoring for British securitized mortgages anymore, and won’t be for a long time. With less money coming into the market, there won’t be the same kind of demand for houses.

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Although the market is currently benefiting from investors and FTBs looking to grab a bargain the economy is still in trouble. If there is high unemplyment then the ability to afford a mortgage will have an impact on whether house prices will continue to rise from here on or whether there will be another dip. I think the later will be the case.

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Yes, its a dead cat and ...

Fourth, for reasons that a psychologist could better explain, the British are attacking the financial-services industry, even though it is the biggest branch of the economy.

The British are retarded.

We knew this already.

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Good article from Bloomberg. I think it just about sums it up, and it makes complete sense from my point of view...

Other option is treading water in a range for the best part of a decade until homes become cheap again <_<

Thats what happened in the 90s after all...

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I like Matthew Lynn's other work too.

Anyone else think he might possibly be a renter/saver?!

Deflation may be bad for particular interest groups, which happen to be very powerful. It is bad for chief executives. It is easier to keep your profits rising in a mildly inflationary environment. You can just jack up your prices a bit, and you can often cut workers’ wages by stealth by holding wages steady.

The banking industry, which has come to rely on inflation to make highly leveraged loans sustainable, also dislikes deflation. Likewise, it is bad for governments, which use inflation to reduce the value of their debts.

On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall.

There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesn’t make them right.

There is no threat from deflation. It may even be desirable if it encourages a balance between saving and consumption, and discourages governments and banks from taking on debt.

http://www.bloomberguniversity.com/apps/ne...id=a_IZywsbozWg

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If it was a bubble, and I beleive it was, a dip followed by a rise then a precipice were inevitable.

hope is back. reality bites.

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Other option is treading water in a range for the best part of a decade until homes become cheap again <_<

Thats what happened in the 90s after all...

i'm increasingly convinced that, unless the base rate goes above 5%, this is what will happen.

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i'm increasingly convinced that, unless the base rate goes above 5%, this is what will happen.

Dont forget record spreads. With new mortgages around 5%, its only takes a base rate increase to say 3% to get mortgage rates of 7.5% and it all falls over.

VMR.

(Yes, I know you can get lower mortgage rates with big deposits and big fees for short terms).

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Dont forget record spreads. With new mortgages around 5%, its only takes a base rate increase to say 3% to get mortgage rates of 7.5% and it all falls over.

VMR.

(Yes, I know you can get lower mortgage rates with big deposits and big fees for short terms).

i suppose i'm half thinking that the spreads wouldn't be sustainable at a higher base rate.

i am not 100% sure what i mean by "not sustainable", i.e. whether the spreads would be defeated by competition, regulation, government intervention, public outcry, or whatever [to be fair it's not obvious that any would be a real threat], but my gut feel is that the current extraordinary spreads between borrowing and lending rates might only be tenable because the headline borrowing rates aren't, by historic standards, very high. there is something of a persistent feeling out there amongst some people that they're 'getting a good deal' by borrowing at current rates. my own mother [who is a fairly simple soul], in a recent discussion about house prices, opined that my generation [born late 70s] is extremely lucky to be able to borrow at such low rates, when double digit was the norm for hers [she doesnt' understand the concept of 'inflation' very well]. you'd have to think that mortgage rates of 7.5% and a base rate of 3% would send out some pretty big shockwaves of some sort, even given the banks' seemingly untouchable status?

Edited by the flying pig

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i suppose i'm half thinking that the spreads wouldn't be sustainable at a higher base rate.

i am not 100% sure what i mean by "not sustainable", i.e. whether the spreads would be defeated by competition, regulation, government intervention, public outcry, or whatever [to be fair it's not obvious that any would be a real threat], but my gut feel is that the current extraordinary spreads between borrowing and lending rates might only be tenable because the headline borrowing rates aren't, by historic standards, very high. there is something of a persistent feeling out there amongst some people that they're 'getting a good deal' by borrowing at current rates. my own mother [who is a fairly simple soul], in a recent discussion about house prices, opined that my generation [born late 70s] is extremely lucky to be able to borrow at such low rates, when double digit was the norm for hers [she doesnt' understand the concept of 'inflation' very well]. you'd have to think that mortgage rates of 7.5% and a base rate of 3% would send out some pretty big shockwaves of some sort, even given the banks' seemingly untouchable status?

Im not so sure spreads wont stay high, maybe not so high as they are now

Whats changed is that the ability for banks to borrow cheaply on the wholesale market is much lower and the risk in UK mortgage lending is perceived to be much higher

If banks are offering 2%+ to retail depositors on fixed rate bonds they need to making 6%+ on mortgages to be making any money after their costs... :unsure:

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Dodgy article IMV. He writes "There are good reasons to expect a second dip in the market later this year or early in 2010." and then his first reason is that interest rates will rise. Interest rates aren't going to rise later this year though, are they? He also says the banks spread is widening on mortgages. Is this true? I know that they have widened, but I see no evidence that they will widen further.

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Spreads not maintained?....wealth producing business loans are already base + 7 and more?

credit cards 17-25% and more

store cards....who knows.

FTB loans are in some cases over 7%.

readers, we have a major banking crisis to pay for. it will be with tax rises and interest rates.

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Spreads not maintained?....wealth producing business loans are already base + 7 and more?

credit cards 17-25% and more

store cards....who knows.

FTB loans are in some cases over 7%.

readers, we have a major banking crisis to pay for. it will be with tax rises and interest rates.

... and huge puiblic sector cuts :(

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Dodgy article IMV. He writes "There are good reasons to expect a second dip in the market later this year or early in 2010." and then his first reason is that interest rates will rise. Interest rates aren't going to rise later this year though, are they? He also says the banks spread is widening on mortgages. Is this true? I know that they have widened, but I see no evidence that they will widen further.

I don't think BOE rates will rise soon (IR futures imply no change right up to June next year). However, I think the rates people getting new mortgages will pay will definitely widen.

Taking Abbey Flexi mortgage as an example...

mid 2007 - was BOE + 0.49%

mid 2008 - was BOE + 1.49%

end 2008 - was BOE + 2.50%

now 2009 - is BOE + 3.25%!!!

Is this going to increase? - Well can't see why it would decrease...

- Banks need to rebuild balance sheets and recover losses - easiest targets are home owners, when they come to remortgage, they can pay the (now huge) fees and pick an uncompetitive product from various other banks, or stick to the arbitary standard variable rate. Those tight on cash will probably not want to fork out the fee (over £1000 in many cases now).

- There is no longer intense competition to lend as much money as possible.

Unfortunately hard evidence will only become apparent in hindsight.

But then that's just my point of view, if everyone had the same view, then there wouldn't be anyone to make money from ;)

Also remember if someone is still on a good deal at say 1% for 2 years from the good times, and they need to remortgage, if they now have to pay 4%+, they're suddenly paying 4x as much per month for the interest, something which maybe not everyone is adequately prepared for.

Edited by jcpricewatcher

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I don't think BOE rates will rise soon (IR futures imply no change right up to June next year). However, I think the rates people getting new mortgages will pay will definitely widen.

Taking Abbey Flexi mortgage as an example...

mid 2007 - was BOE + 0.49%

mid 2008 - was BOE + 1.49%

end 2008 - was BOE + 2.50%

now 2009 - is BOE + 3.25%!!!

Is this going to increase? - Well can't see why it would decrease...

- Banks need to rebuild balance sheets and recover losses - easiest targets are home owners, when they come to remortgage, they can pay the (now huge) fees and pick an uncompetitive product from various other banks, or stick to the arbitary standard variable rate. Those tight on cash will probably not want to fork out the fee (over £1000 in many cases now).

- There is no longer intense competition to lend as much money as possible.

Unfortunately hard evidence will only become apparent in hindsight.

But then that's just my point of view, if everyone had the same view, then there wouldn't be anyone to make money from ;)

My hazy memory says in the mid 90s mortgages were typically base +2.5%, which seems about right for normal market conditions

Sub-prime and BTL loans were maybe BoE plus 4-5%...

This is just normal, the recent past was an aberation (sp?)

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My hazy memory says in the mid 90s mortgages were typically base +2.5%, which seems about right for normal market conditions

Sub-prime and BTL loans were maybe BoE plus 4-5%...

This is just normal, the recent past was an aberation (sp?)

Yes, you're right, but in the mid 90's, the banks weren't brought down to their knees in the worst banking crisis in generations. Also, the labour government yet hadn't kicked off the biggest boom/bust in generations either. (And had about 5 years to recover from the early 90's bust)

Once we've recovered from all that, then BOE+2.5% would seem reasonable. I guess the question is when?

Edited by jcpricewatcher

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I don't think BOE rates will rise soon (IR futures imply no change right up to June next year). However, I think the rates people getting new mortgages will pay will definitely widen.

Taking Abbey Flexi mortgage as an example...

mid 2007 - was BOE + 0.49%

mid 2008 - was BOE + 1.49%

end 2008 - was BOE + 2.50%

now 2009 - is BOE + 3.25%!!!

Is this going to increase? - Well can't see why it would decrease...

- Banks need to rebuild balance sheets and recover losses - easiest targets are home owners, when they come to remortgage, they can pay the (now huge) fees and pick an uncompetitive product from various other banks, or stick to the arbitary standard variable rate. Those tight on cash will probably not want to fork out the fee (over £1000 in many cases now).

- There is no longer intense competition to lend as much money as possible.

Unfortunately hard evidence will only become apparent in hindsight.

But then that's just my point of view, if everyone had the same view, then there wouldn't be anyone to make money from ;)

Also remember if someone is still on a good deal at say 1% for 2 years from the good times, and they need to remortgage, if they now have to pay 4%+, they're suddenly paying 4x as much per month for the interest, something which maybe not everyone is adequately prepared for.

bank margins

price of petrol/diesel

utility costs

we all moan and whinge about them for a while, but they quickly become accepted as normal. Why would any of the companies involved help us out?

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Dodgy article IMV. He writes "There are good reasons to expect a second dip in the market later this year or early in 2010." and then his first reason is that interest rates will rise. Interest rates aren't going to rise later this year though, are they? He also says the banks spread is widening on mortgages. Is this true? I know that they have widened, but I see no evidence that they will widen further.

I often wonder whether Merv will take back QE first, or raise interest rates first. He can see as well as the rest of us the amount of malinvestment in properdee as opposed to businesses at the moment.

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I often wonder whether Merv will take back QE first, or raise interest rates first. He can see as well as the rest of us the amount of malinvestment in properdee as opposed to businesses at the moment.

He's all for it.

Says one thing, does the opposite. Total knob end, end of story. With central bankers you have to watch what they do, not what they say.

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He's all for it.

Says one thing, does the opposite. Total knob end, end of story. With central bankers you have to watch what they do, not what they say.

Errm, isn't that the same with just about everyone...

Politicians, Estate Agents, Sales men, etc etc...

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The chairman of the U.K.’s Financial Services Authority, Adair Turner, even proposed a tax on financial transactions to help limit the size of the industry. He described parts of banking as “socially useless.†With that sort of attitude, it won’t be surprising if many foreign bankers go elsewhere, withdrawing their support from the housing market.

I'm warming to this Adair Turner guy already.

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Errm, isn't that the same with just about everyone...

Politicians, Estate Agents, Sales men, etc etc...

Well, you've given me three examples, which I can't say I disagree with.

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