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B of E says Property loan default risk increasing


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Bank of England Says Property-Loan Default Risk Is Increasing

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By Simon Packard

Dec. 18 (Bloomberg) -- U.K. banks face an increased risk of default on some of the country’s 250 billion pounds ($403 billion) of commercial real-estate loans, the Bank of England said today.

In the past year, the longest recession on record meant the “probability of default by U.K. real estate companies has increased significantly,” the central bank said in its Financial Stability Report, which is published every six months.

Property owners may struggle to service loans as the recession and mounting unemployment boost building vacancies and depress rents. Falling property values and larger down payments for new loans mean investors, particularly smaller companies, face “significant” challenges in refinancing 160 billion pounds of loans coming due through 2013, the bank said.

Lenders wrote down real-estate loans by 10 billion pounds in the 18 months through June and “substantial further impairments” may follow if defaults increase, the central bank said. Standard & Poor’s Ratings Services estimates banks may need to write down 23 billion pounds of real estate loans in 2009 to 2011, with the losses increasing to 37 billion pounds in the eventuality of a “stress scenario,” the central bank said.

So far, most lenders have held on to repossessed properties during foreclosures, the Bank of England said. If the number of repossessed assets mounts, the companies might trigger a negative spiral if they try to sell too many.

A flood of sales would spark a fresh wave of price declines that would drive more loans into default, the central bank said in today’s report. “It could leave banks less able to supply credit to the wider economy,” it said.

‘Further to Fall’

A rise in real estate values on a monthly basis since August is largely the result of pricing for prime buildings, and “non-prime capital values may have further to fall,” the central bank said.

While the Financial Stability Report highlighted the risks banks face from their commercial real-estate loans, this was balanced by reports on how lenders have responded and signs that the worst of the global financial crisis may be over.

Property prices fell 45 percent from the market’s peak in mid-2007 to July 2009, according to Investment Property Databank Ltd., a London-based research firm. So far, that’s had a limited impact on the banks, the Bank of England said.

Lenders have overlooked technical breaches of loans caused by lower property values, provided interest payments are met. They have also avoided revaluing properties backing their loans, the central bank said, citing “market contacts” and a study by De Montfort University.

Separately, property investors said banks are more willing to renegotiate loans with borrowers, often charging higher rates of interest, which allows them to avoid booking losses.

“A rolling loan gathers no loss,” said Don Jordison, managing director of Threadneedle Property Investments, describing one of the reasons why he’s more confident about the outlook for the U.K. property market.

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And yet at the same time they managed to say UK banks are more stable.

Haven't you heard of superposition. The instabilities cancel each other out perfectly.

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Haven't you heard of superposition. The instabilities cancel each other out perfectly.

http://en.wikipedia.org/wiki/Superposition_principle

In physics and systems theory, the superposition principle, also known as superposition property, states that, for all linear systems,

The net response at a given place and time caused by two or more stimuli is the sum of the responses which would have been caused by each stimulus individually.

So that if input A produces response X and input B produces response Y then input (A + B) produces response (X + Y).

Mathematically, for all linear systems F(x) = y, where x is some sort of stimulus (input) and y is some sort of response (output), the superposition (i.e., sum) of stimuli yields a superposition of the respective responses:

F(x_1+x_2+\cdots)=F(x_1)+F(x_2)+\cdots.

In mathematics, this property is more commonly referred to as additivity. In most realistic cases, the additivity of F implies that it is a linear map, which is also called a linear function or linear operator.

This principle has many applications in physics and engineering because many physical systems can be modeled as linear systems. For example, a beam can be modeled as a linear system where the input stimulus is the load on the beam and the output response is the deflection of the beam. Because physical systems are generally only approximately linear, the superposition principle is only an approximation of the true physical behavior; it provides insight for typical operational regions for these systems.

The superposition principle applies to any linear system, including algebraic equations, linear differential equations, and systems of equations of those forms. The stimuli and responses could be numbers, functions, vectors, vector fields, time-varying signals, or any other object which satisfies certain axioms. Note that when vectors or vector fields are involved, a superposition is interpreted as a vector sum.

Not that this means much to me but do you mean this?

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Bank of England Says Property-Loan Default Risk Is Increasing

Share Business ExchangeTwitterFacebook| Email | Print | A A A

By Simon Packard

Dec. 18 (Bloomberg) -- U.K. banks face an increased risk of default on some of the country’s 250 billion pounds ($403 billion) of commercial real-estate loans, the Bank of England said today.

In the past year, the longest recession on record meant the “probability of default by U.K. real estate companies has increased significantly,” the central bank said in its Financial Stability Report, which is published every six months.

Property owners may struggle to service loans as the recession and mounting unemployment boost building vacancies and depress rents. Falling property values and larger down payments for new loans mean investors, particularly smaller companies, face “significant” challenges in refinancing 160 billion pounds of loans coming due through 2013, the bank said.

Lenders wrote down real-estate loans by 10 billion pounds in the 18 months through June and “substantial further impairments” may follow if defaults increase, the central bank said. Standard & Poor’s Ratings Services estimates banks may need to write down 23 billion pounds of real estate loans in 2009 to 2011, with the losses increasing to 37 billion pounds in the eventuality of a “stress scenario,” the central bank said.

So far, most lenders have held on to repossessed properties during foreclosures, the Bank of England said. If the number of repossessed assets mounts, the companies might trigger a negative spiral if they try to sell too many.

A flood of sales would spark a fresh wave of price declines that would drive more loans into default, the central bank said in today’s report. “It could leave banks less able to supply credit to the wider economy,” it said.

‘Further to Fall’

A rise in real estate values on a monthly basis since August is largely the result of pricing for prime buildings, and “non-prime capital values may have further to fall,” the central bank said.

While the Financial Stability Report highlighted the risks banks face from their commercial real-estate loans, this was balanced by reports on how lenders have responded and signs that the worst of the global financial crisis may be over.

[i]Property prices fell 45 percent from the market’s peak in mid-2007 to July 2009, according to Investment Property Databank Ltd., a London-based research firm. So far, that’s had a limited impact on the banks, the Bank of England said.[/i]

Lenders have overlooked technical breaches of loans caused by lower property values, provided interest payments are met. They have also avoided revaluing properties backing their loans, the central bank said, citing “market contacts” and a study by De Montfort University.

Separately, property investors said banks are more willing to renegotiate loans with borrowers, often charging higher rates of interest, which allows them to avoid booking losses.

“A rolling loan gathers no loss,” said Don Jordison, managing director of Threadneedle Property Investments, describing one of the reasons why he’s more confident about the outlook for the U.K. property market.

45%? where, when? Have I missed something?

Edited by Flatdog
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The UK's financial system has become "significantly more stable over the past six months", the Bank of England has reported.

.......

It said that over the past six months, banks had been able to increase their profits, reduce concerns about potential future losses and raise further external capital - thereby reducing their reliance upon short-term funding.

Although it does mention the threat of commercial loans, luckily RBS, HBoS never got involved in that toxic crap.

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45%? where, when? Have I missed something?

commercial property,in which the market hasnt been temporarily rigged, by the end of all this in a couple of decades commercial property will have lost the proverbial bear market 90%er in real terms, it will be rather pleasant seeing the new times rich list in 5 years time that isnt dominated 90% by property speculators

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the private house property market is only missing out on defaults to banks because of government ( taxpayers ) bailouts....not to protect the residents from possession ( the public reason) but to protect the stability of banks ( the real reason).

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Very very bearish stuff. Excepting the throwaway sentence from the property company at the end.

Lenders have overlooked technical breaches of loans caused by lower property values, provided interest payments are met. They have also avoided revaluing properties backing their loans, the central bank said, citing “market contacts” and a study by De Montfort University.

So, they're holding off from margin calls - for now. And not revaluing things in order to keep their balance sheets looking better than they really are. Nothing new there, but interesting to see the BofE mentioning it.

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