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How Panic In Europe Could Hurt Uk House Prices

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http://www.moneyweek.com/investments/property/uk/how-panic-in-europe-could-hurt-uk-house-prices-13901

How panic in Europe could hurt UK house prices

By Associate Editor David Stevenson Sep 23, 2011

It's safe to say that markets didn't think much of Operation Twist.

Yesterday was brutal. The FTSE 100 plunged 4.7%, while French shares fell 5.2% and the German Dax lost 5%.

The similarities to 2008 and the Lehman Brothers collapse are growing by the minute. Shares, commodities, gold – everything fell as investors ran to the 'safety' of the US dollar.

And in the background, there's another Lehman-era disaster brewing. One that could hit a market very much closer to most British people's hearts: the UK housing market.

The Bank of England may lose control of interest rates

British house prices have been remarkably resilient following the global economic crisis. Sure, in 'real' (inflation-adjusted) terms, they've fallen a fair bit from the peak, outside London. But they remain hugely expensive on a historic basis.

What's kept them propped up? Bulls will go on and on about supply and demand. But in reality, it all comes down to interest rates. With the Bank of England slashing the bank rate to 0.5%, many homeowners have seen the cost of their mortgages plunge to unheard-of lows. That's enabled people to hang on to homes they might otherwise have been forced to sell.

Surely with the current carnage in the markets, we can at least rely on interest rates to stay low? Certainly the Bank of England has no plans to hike rates any time soon. Indeed, a fresh bout of quantitative easing seems far more likely.

But it's not just down to the Bank. The cost of home loans may be bottoming out. And it all stems from what's going wrong in the European banking system.

Counterparty risk is making a comeback

We wrote recently about counterparty risk. In short, it's the risk that you make a deal with someone, and they then fail to hold up their end. Like backing a winner at the races, and then finding the bookie has done a runner when you go to collect your winnings.

Counterparty risk becomes a serious problem when banks start to get worried about lending to each other. And that's what's happening in Europe now. Small wonder. The International Monetary Fund (IMF) has just warned that European banks are sitting on a staggering €300bn of losses from the eurozone sovereign debt crisis. Would you want to lend to anyone who might be exposed to that sort of loss?

As the IMF says, this is putting the financial system in its greatest danger for years. For one thing, these losses will prove very nasty news for Europe's economy. Interbank lending is already falling. If the carnage in other markets continues, it'll probably freeze up even more.

That'll make credit even harder for businesses and households to get hold of. And this is where the interest rate risk we were talking about earlier comes in.

11-09-23-swap-rate.gif

(see thumbnail at bottom of my post)

The purple line is the key. This is the gap in ten-year swap rates – which you can read about here – between Germany and the eurozone overall.

What does that mean? Germany is seen as the safest country in the EU. So the higher the purple line goes, the more worried markets are about the state of the rest of eurozone. As jitters over Greece, Portugal, Ireland, Spain and Italy have grown, the Germany/euro swap rate gap has climbed steadily. In fact it has now risen to the levels it reached when Lehman went bust.

And here's the nub of the problem – this also affects the UK.

The blue line on the chart is the three-month London interbank rate (LIBOR) at which banks lend sterling to each other for three-month periods. During the last two months in particular – as you can see clearly on the chart – it has been pulled higher by the purple line. That's despite the fact that the Bank of England rate (the black line) hasn't budged from 0.5%.

Why now could be a good time to fix your mortgage

In other words, almost every day, UK banks are being forced to pay more to borrow in the money markets.

And if banks have to pay more to borrow money, they'll have to charge the likes of you and me more to borrow as well.

Already, building societies are only lending what they can attract as retail deposits. They aren't borrowing in the wholesale money markets at all, Ray Boulger of John Charcol tells Lorna Bourke at Citywire.

"If, or when, Greece defaults and comes out of the euro, banks will be wary of lending to each other and there'll be a shortage of mortgage finance", he says. Lenders will push up mortgage costs – "first because they can, and second to stop being swamped with business."

Mortgage lending is already tight. If it tightens any further, then that'll make it even harder for the housing market to defy gravity.

As Mark Johnston of Mortgage News notes, "two-thirds of UK home owners have a variable rate mortgage, meaning 8m households would pay more when interest rates rise. A rate rise of just 1% would increase monthly repayments on an average £150,000 variable rate mortgage by £43 a month or £516 a year".

That could tip many already cash-strapped home owners over the financial edge. In turn this could lift repossessions and forced sales – and drive down house prices.

It also points to one clear conclusion for existing homeowners. If you currently have a floating rate mortgage, this could be a good time to take advantage of a cheap fixed rate product while you still can. We have more on this topic in the latest issue of MoneyWeek magazine, out today: Is now the time to fix your mortgage? If you're not already a subscriber, get your first three copies free here.

11-09-23-swap-rate.gif

post-14397-0-55520100-1316772581_thumb.gif

Edited by KingBingo

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When I read it there was just one comment.

Some numpty arguing that house prices are affordable etc. Not arguing that the article is wrong and the housing market is fecked!!!

I guess this means that drops will really kick in now. The BoE rate has been seperated and irrelevant to the banks real rates for some time now. Maybe Greece is doing us a favour after all. Get this toxic debt out once and for all and then we can all move on with better lives.

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Must admit I've been struggling to see what other driver there was to lower prices as interest rates are unlikely to rise soon. Unemployement could do it as the recession develops. I had a slap forhead and go 'Doh' moment when I read the article. I'd forgotton about LIBOR.

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So if Greece can cause so much damage, what happens when the whole Eurozone fractures? Is it just about inevitable now that mortgage rates will be forced upwards?

On Newsnight a few nights ago someone did say that if the Eurozone collapsed then about 20% of GDP would be wiped out across the continent! :huh:

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Already, building societies are only lending what they can attract as retail deposits. They aren't borrowing in the wholesale money markets at all, Ray Boulger of John Charcol tells Lorna Bourke at Citywire.

That's weird. Why don't they just create deposits out of 'thin air'?

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On Newsnight a few nights ago someone did say that if the Eurozone collapsed then about 20% of GDP would be wiped out across the continent! :huh:

EU propaganda boll@cks, utter tosh.

Free markets do not need supra national government.

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That's weird. Why don't they just create deposits out of 'thin air'?

Because only banks can do this. Building societies are not banks.

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Because only banks can do this. Building societies are not banks.

No, they can't.

Hbos?

Northern Rock?

Bradford and Bungle?

So, you're arguing that since they were all banks as opposed to building societies they could create deposits out of thin air rather than having to borrow them off savers and the securities/money markets?

If so, why didn't they just create the deposits they were missing out of thin air and they wouldn't have needed rescuing?

This thin air nonsense is just silly and needs to stop.

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EU propaganda boll@cks, utter tosh.

Free markets do not need supra national government.

I think currency collapse would make a dent in GDP... :rolleyes:

btw I agree with you! But the immediate impact of the Eurozone collapsing would be massive.

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When I read it there was just one comment.

Some numpty arguing that house prices are affordable etc. Not arguing that the article is wrong and the housing market is fecked!!!

I guess this means that drops will really kick in now. The BoE rate has been seperated and irrelevant to the banks real rates for some time now. Maybe Greece is doing us a favour after all. Get this toxic debt out once and for all and then we can all move on with better lives.

Yep, the Greeks would be best to tell their Govt to do the Icelandic thing. The lenders are just as much at fault in this mess. The EU is at fault for letting them join and 'overlooking' so much that was not right about it. B)

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The ability to do that requires trust. It is trust that is breaking down.

eh?

It's the ability to repay the savings with a profitable margin spread for the intermediator that's breaking down.

Once you understand your 'thin air' meme is wrong you'll get it.

Btw, are you a banker?

edit: typo

Edited by Red Knight

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I feel conflicted. I am caught between my pro-European desire to see the Euro succeed, and my HPC dream of a functioning UK housing market (ie house price falls that leave King, Osborne, Shapps, etc, bleeding from the ears). No wonder Cameron has come over all shrill, signing letters to Sarkozy and thumping the lectern and demanding action.

Fortunately, no-one will be paying any attention - the best Cameron can hope for is to time his comments to coincide with Obama's and hope people credit him instead.

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No, they can't.

Hbos?

Northern Rock?

Bradford and Bungle?

So, you're arguing that since they were all banks as opposed to building societies they could create deposits out of thin air rather than having to borrow them off savers and the securities/money markets?

If so, why didn't they just create the deposits they were missing out of thin air and they wouldn't have needed rescuing?

This thin air nonsense is just silly and needs to stop.

Oh really? So banks have one pound's worth of assets for every pound they 'lend' then, do they?

They don't create money out of thin air, they extend BANK CREDIT out of thin air. This is only party backed by actual assets.

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Bringing the thread back on course, hopefully, it is beginning to look like the Euro/Global crisis could very soon force the uK banks to begin raising mortgage rates and other loans?

Question - anyone know the figures for how many mortgages are on standard variable rate versus fixed rate and/or tracker mortgages?

As the bankin crisis is now well under way the next 6 weeks, or the time between now and Chistmas, may well give many of us HPCers what we need to see house asking prices coming down.

Yes, I am sure some will accuse me of being a cold, heartless so and so - still can't figure why there are people posting on HPC who are against house prices coming down - but the lunancy of high asking prices now needs to get a serious dose of reality. Hopefully, this banking crisis will do it.

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So if Greece can cause so much damage, what happens when the whole Eurozone fractures? Is it just about inevitable now that mortgage rates will be forced upwards?

When the Eurozone fractures, the likes of Greece, Spain and Ireland will be able to devalue and things will start to improve, just like they did when the ERM collapsed and we devalued.

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That's weird. Why don't they just create deposits out of 'thin air'?

Because they can't. Deposits are created when borrowed money is deposited back into the bank. What we are seeing is a reduction in borrowings which means ultimately a 20 fold reduction in deposits.

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Moneyweek must be right (eventually) but so is a stopped clock.

I've always had a feeling about MoneyWeek that they have an agenda. They surely have a motive for pumping either this or that other than pure altruism, or at least that is how it seems to me. Or am I just some kind of cynic?

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I've always had a feeling about MoneyWeek that they have an agenda. They surely have a motive for pumping either this or that other than pure altruism, or at least that is how it seems to me. Or am I just some kind of cynic?

I think what they say sounds reasonable (it has been HPC comfort food for many a year) but unfortunately they consistently underestimate the desire (and power) of the powers that be to take a completely different direction. I don't claim to have any greater insight but I don't charge for my insight. Also I don't think it helps that their editor doesn't walk the talk.

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No, they can't.

Hbos?

Northern Rock?

Bradford and Bungle?

So, you're arguing that since they were all banks as opposed to building societies they could create deposits out of thin air rather than having to borrow them off savers and the securities/money markets?

If so, why didn't they just create the deposits they were missing out of thin air and they wouldn't have needed rescuing?

This thin air nonsense is just silly and needs to stop.

+1

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  • 337 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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