Jump to content
House Price Crash Forum
Maursh

Musings About Bank Accounts And Investments

Recommended Posts

I know there is a big thread running at the moment on the forthcoming financial Armageddon part II, but let's put that to one side and assume all is well in the world apart from over-priced housing bubble.

I have been thinking quite a bit lately there is so much money in property, I can't help but wonder if investment has been diverted from other areas of the economy such as new enterprises, technology, research and development. I sure that it must have been. I was thinking that if there is a sudden sell off of property, where will the money go (it might simply not exist anymore and go nowhere of course) specifically if the stock market would take off given that it has been so flat during the period of high house prices.

This got me thinking about how some people on here are cash rich. In the past I have read quite a bit about those who have sold to rent and are simply sitting on cash. Have they thought about how banks are using their cash to loan out to those who would like to buy property?

So to put it another way, by not investing funds elsewhere (stocks, bonds, private enterprise) you are helping to fuel the housing bubble.....

(I did entitle this musings for a reason...)

Share this post


Link to post
Share on other sites

Although I've never owned a property, I do have savings, in savings accounts. Including NS&I.

There's some point when the saver-renters have to be let off from attacks. Savers have to be able to put their savings somewhere, and it's not exactly high yielding returns in savings.

Then VI owners laughing at those of us in dead money savings vs the excellence of other investments. We get VIs wanting renter-savers wiped out so that there can be mortgage/BLT debt forgiveness where the owner side lives happily ever after, renter-savers can go and earn tuppnybit per hour in the New Order, then the owner side can go and mew to get back into BTL again.

Share this post


Link to post
Share on other sites

Also the banks could be smoothing out risk, in last few years where buyers/BTLers having been pushing and falling over each other to pay ever higher prices / take on mortgage debt.

Where savers will ultimately be rewarded in a hpc.

Share this post


Link to post
Share on other sites

Maursh, you are right if you have £100k in nationwide you are part of the problem. But many hpcers are prudent by nature and don't want to go deep in stocks. I have a mixed bag exc resi property. Ultimately i want to take my money out of this feudal country.

Share this post


Link to post
Share on other sites

An interesting theory. However I believe that as reserve ratios of deposit to lending the banks can employ, they are in effect lending out no real money at all but instead creating credit. Therefore the renter/saver is not helping to fuel the housing bubble at all, but is merely a bystander, an observer waiting on the side lines, with fingers crossed that when the house of cards comes crashing down, they are still left with their wealth and the opportunities it will bring.

It is a gamble to be a saver of currency in a banking system, that is reliant on the repayment of credit lent out into a housing market, that can only yield a return should those loans be repayable. I do not see logically how a crash in house prices, having such a detrimental effect on the banking system, will benefit those using those very same banks as their savings vehicle. I think it likely that bail ins would occur in a recurrent financial crisis, as it one of the few options still left on the table, and has proven to work in other examples in recent history.

Share this post


Link to post
Share on other sites

It is a gamble to be a saver of currency in a banking system, that is reliant on the repayment of credit lent out into a housing market, that can only yield a return should those loans be repayable. I do not see logically how a crash in house prices, having such a detrimental effect on the banking system, will benefit those using those very same banks as their savings vehicle. I think it likely that bail ins would occur in a recurrent financial crisis, as it one of the few options still left on the table, and has proven to work in other examples in recent history.

Meanwhile banks are getting ever stronger to withstand a mighty HPC.

http://www.bbc.co.uk/news/business-30491161

If anyone needs to be brought into the real world, it's many hundreds of thousands of owners in this position. Scaremongering for renter-savers who've managed to put a little aside against lunatic house prices... bail-ins (and wipeout of renter-savers for BTLers to be let off and OOs left in position to MEW and BTL later - you know who you are)...

What annoys many people is rachman - like many in London - are literally lottery winners. (Being given £1-1.5 million pounds fir nothing can most definitely be classed as a lottery win)

And are not even cashing it in !!

There is also the belief that they are somehow deserving of it - which is ********. Ask any if them to take 10k and make it into the same money in 15 years from now - and 99.9% of them will fail. Simple as that.

I finally have time this evening to address this response to my post.

You're using exactly the same generalisation of a systemic banking crisis as RK did, and although it all sounds very scary, I'd ask you to carefully read my own post again and give it more than a cut-and-paste consideration. We're all well aware of what a bank run is, and I don't think anyone on this forum has written more than I have regarding the Great Depression and the arguments that still persist to this day about the policy response from the Federal Reserve.

I wasn't talking about the sort of circumstances that occurred in 1929-32 or 2007-09, when there were underlying reasons for the systemic financial crisis that went way beyond concerns regarding possible falls in houses prices (if you recall, UK house prices were not falling at the time of the Northern Rock affair and had yet to peak on several of the indices).

My words were (my bold): "Not sure why it's being implied that a collapse in the value of the underlying security automatically leads to the destruction of the banks' loan assets".

I'm talking about a hypothetical situation where (say) over the next three to five years UK house prices drop nominally by 30%. You claim "we know exactly what happens" and cite the bank runs of the Great Depression.

I'd say that is a completely absurd scenario. The bank run you talk of is purely a liquidity issue, and the BoE is far better prepared for this now than it was in 2008. Back then the Special Liquidity Scheme (SLS) and long-term repos gave the banking system the requisite liquidity to avoid balance sheet funding issues. At its peak in Q1 2009, SLS supplied £185bn of funding to the banking system through a collateral swap for Treasury Bills, before QE had even started (and I'd remind everyone that QE created new bank deposits).

So if you are going to claim that we will have a meltdown that will result in the loss of savers' deposits, you need to describe the process that will lead to the collapse of the banks through insolvency, not lack of liquidity. I specifically gave a link to the BoE QB article on negative equity (which you appear to have ignored) because past experience has shown that people will continue to service their mortgage even when they are deeply in negative equity. That was the experience in the 1990s crash, and it was also the experience more recently, leading the FSA to conclude in the MMR that LTV caps were not particularly useful because the correlation between high LTVs and mortgage default was weak. However you claim that "a heck of a lot of people will default" without giving any estimate whatsoever. Just the arm-waving, scary language that RK uses, with no data whatsoever to back it up.

If you want a specific example to use, how about Nationwide, which is predominantly a domestic mortgage lender so its balance sheet isn't cluttered with derivatives, commercial loans, or investment banking related activities.

The 2014 accounts are here. On page 93 you will find a detailed breakdown of their mortgage book by LTV (including on a regional basis as well).

Please describe the scenario that leads to Nationwide deposit holders losing ANY of their funds under a 30% nominal fall in house prices.

[i'll add as a final point that if you can make a convincing case for a loss for depositors, then we need to let the BoE know ASAP, because they're about to stress test banks against a 35% fall in house prices, and the expectation is that banks' Tier 1 capital will be able to take the hit.]

There's also self-balancing of the profits lenders can book in selling mortgages in volume to younger people on HPC'd houses. Smug owner outright / equity rich £500K+ owners are the ones who need to be looking forwards. Having no/little mortgage debt on all those houses is not good for the banks - and so many higher end value houses owned outright. Guardian a while ago suggested fewer than 2 in 5 properties have a mortgage, although I think that's a bit optimistic. HPC may serve banks' purposes after they've run out selling jumbo mortgages to those who want to pay these house prices in today's market.

Share this post


Link to post
Share on other sites
However I believe that as reserve ratios of deposit to lending the banks can employ, they are in effect lending out no real money at all but instead creating credit.

+1 It was the ability of the banks to create credit from thin air rather than excess savings by joe public that really fueled the housing bubble.

The common sense view that Banks lend out other people's money is one of those urban myths in which no one actually believes- no one seriously expects to go to the bank one day to withdraw some savings only to be told they can't because their savings have been loaned out to someone else- if this ever happened it would be front page news the next day and questions would be asked in the House.

Incredible as it seems most people have never really thought much about where money actually comes from- they see it a bit like air- something so vital to their lives that it just 'is'.

Share this post


Link to post
Share on other sites

+1 It was the ability of the banks to create credit from thin air rather than excess savings by joe public that really fueled the housing bubble.

The common sense view that Banks lend out other people's money is one of those urban myths in which no one actually believes- no one seriously expects to go to the bank one day to withdraw some savings only to be told they can't because their savings have been loaned out to someone else- if this ever happened it would be front page news the next day and questions would be asked in the House.

Incredible as it seems most people have never really thought much about where money actually comes from- they see it a bit like air- something so vital to their lives that it just 'is'.

There are two sides to the lending equation, and it requires applicant borrowers.

Don't include me in the never thought about it. Already being told how saving is dead money, year after year.

Save the lessons about credit/money for those who are bragging on about their £1m+ houses, forecasting even more HPI, and when the HPC comes in. Durr HPI forever.

Daily Mail

Average UK house price to hit £780,000 by 2040, says leading think tank

Kilo Charlie, My World, 9 hours ago

We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus. It's certainly possible and quite likely.

Sam, Bucks, 3 hours ago

Bought house in ,74 for 16k added extention about £8k now valued at £480k you do the maths?

Edited by Venger

Share this post


Link to post
Share on other sites

I hope they leverage any savings I have to the max and beyond. Lend it out to some hapless family that just want a secure home near a half decent school with a conservatory and three toilets, and are willing to mortgage themselves to 7 times their salary. Hopefully it will push prices even higher and they'll have to bleed money through their eyes just to make the payments. Then default and end up in a damp two bed rental flat having to move every year or two. The only way a crash is going to happen is when everything is maxed out. It's gonna have to seriously explode. Run a market this screwed up and it ends up with divisive irrational selfishness. I don't give a ****** anymore. I'm protecting myself and hoping prices go to the moon.

Share this post


Link to post
Share on other sites

Why?

helping to finance a major BTL lender.

Personally, I don't chase rates any more. Money goes into envelopes if I want to save for something. There doesn't seem to be much point lending my money to a bank for 1% and risk a bail-in (partial confiscation).

Share this post


Link to post
Share on other sites

I know there is a big thread running at the moment on the forthcoming financial Armageddon part II, but let's put that to one side and assume all is well in the world apart from over-priced housing bubble.

I have been thinking quite a bit lately there is so much money in property, I can't help but wonder if investment has been diverted from other areas of the economy such as new enterprises, technology, research and development. I sure that it must have been. I was thinking that if there is a sudden sell off of property, where will the money go (it might simply not exist anymore and go nowhere of course) specifically if the stock market would take off given that it has been so flat during the period of high house prices.

This got me thinking about how some people on here are cash rich. In the past I have read quite a bit about those who have sold to rent and are simply sitting on cash. Have they thought about how banks are using their cash to loan out to those who would like to buy property?

So to put it another way, by not investing funds elsewhere (stocks, bonds, private enterprise) you are helping to fuel the housing bubble.....

(I did entitle this musings for a reason...)

No doubt you are right. For example, the amount any organisation and business has to pay directly (on property) and indirectly (on salaries for workers to afford property) is a major drag on the real economy.

However, if there is a crash, as a lot of the money is debt-issued mortgages, the money will not suddenly be available for other things as it will be written off - destroyed.

Share this post


Link to post
Share on other sites

For once the ONS cuts to the chase on household wealth with a good summary here on page one. The OP is right that the cash that was created out of the housing boom didn't just go away, it is there in cash form or moved to financials and in some cases will be the product of STR. It's very hard to destroy money that has been created especially when you have got the protection of Central banks.

http://www.ons.gov.uk/ons/rel/cap-stock/the-national-balance-sheet/2014-estimates/stb-national-balance-sheet--2014-estimates.html?format=print

Balance Sheet of Household sector 31.12.2013

Assets

Property.........4.4 trillion (net of debt)

Financials...... 3.1 trillion

Cash.............1.4 trillion

Liabilities

Other debt ?......(0.4 trillion)

Net Assets.......8.5 trillion (£320,000 per household)

UK net worth is 7.6 trillion courtesy of you know who and their pensions funds being bankrupt.

Household leverage is 15% assuming gross assets of 10 trillion and debt of 1.5 trillion.

Asset allocation.......... House (net of mortgage) 52%, Financials 36%, Cash 16%, Non mortgage debt( -4%) = 100%

Well that's my reading of their summaries in this summary of summaries anyway. :unsure:

Edited by crashmonitor

Share this post


Link to post
Share on other sites

14 comments so far and no has mentioned FLS? So I withdraw my savings from the bank - they just then take out more through this scheme. Savings rates have been so low in recent years for this reason - banks don't need funds from savers right now.

Share this post


Link to post
Share on other sites

Great, so not only have I been locked out of home ownership I now get blamed because my efforts to save enough money to escape the trap somehow 'fuel the bubble' because the banks are using my money as collateral against lending even more money to idiots to bid up prices with.

Just how exactly am I supposed to opt out? I have no control over the bank's lending decisions and I have no control over the amount of debt other people are willing to put themselves in.

If only I'd given my house deposit away, or never saved it in the first place! Houses might then be 0.0001% cheaper! That's surely got to be well within reach of the 100% mortgage I'd be needing!

I don't want to be an investor. I just want to be able to save up and buy a flat of my own, like my parents did their house.

Edited by irrationalactor

Share this post


Link to post
Share on other sites

If only I'd given my house deposit away, or never saved it in the first place! Houses might then be 0.0001% cheaper! That's surely got to be well within reach of the 100% mortgage I'd be needing!

I don't want to be an investor. I just want to be able to save up and buy a flat of my own, like my parents did their house.

:lol:

Get it spent into property. The renter savers are the enemy of so many with their dead money. Few thousand pounds in savings vs their £500K-£1m owned outright HPI fest long wave values.

http://www.rightmove.co.uk/property-for-sale/property-51516532.html

http://catalogue.auctions.savills.co.uk/London-National/Online-Catalogue/#&&s=2

Share this post


Link to post
Share on other sites

I know there is a big thread running at the moment on the forthcoming financial Armageddon part II, but let's put that to one side and assume all is well in the world apart from over-priced housing bubble.

I have been thinking quite a bit lately there is so much money in property, I can't help but wonder if investment has been diverted from other areas of the economy such as new enterprises, technology, research and development. I sure that it must have been. I was thinking that if there is a sudden sell off of property, where will the money go (it might simply not exist anymore and go nowhere of course) specifically if the stock market would take off given that it has been so flat during the period of high house prices.

This got me thinking about how some people on here are cash rich. In the past I have read quite a bit about those who have sold to rent and are simply sitting on cash. Have they thought about how banks are using their cash to loan out to those who would like to buy property?

So to put it another way, by not investing funds elsewhere (stocks, bonds, private enterprise) you are helping to fuel the housing bubble.....

(I did entitle this musings for a reason...)

I can give you an anecdotal. The father of a friend of mine recently came into a huge amount of money. He gave some of it away to his sons to avoid the inheritance tax. All three sons, and the father are now up to their necks in multiple BTL's each.

Share this post


Link to post
Share on other sites

FLS was skewed to fund SME - it had aspirations towards something other than the property markets.

Banks did not create credit out of thin air either (pre-credit crunch that is QE is another matter)...they used a securitisation process: they borrowed from money markets, to create mortgages, and then re-sold these mortgages MBS / CDOs / CMOs.

As far as I am aware, banks loaning out money that customers save is not a "myth" it is the underpinnings of the banking model. All banks have a reserve requirement set by the central bank which is the difference between deposit and loans. https://en.wikipedia.org/wiki/Reserve_requirement

Sorry to make you feel bad, irrationalactor. If you don't want to invest, cash under the mattress is always an option.

Share this post


Link to post
Share on other sites

+1 It was the ability of the banks to create credit from thin air rather than excess savings by joe public that really fueled the housing bubble.

The common sense view that Banks lend out other people's money is one of those urban myths in which no one actually believes- no one seriously expects to go to the bank one day to withdraw some savings only to be told they can't because their savings have been loaned out to someone else- if this ever happened it would be front page news the next day and questions would be asked in the House.

Incredible as it seems most people have never really thought much about where money actually comes from- they see it a bit like air- something so vital to their lives that it just 'is'.

I don't know if you caught what the BoE said in May? The money in your bank is no longer legally yours? It's on my signature thing FYI.

Share this post


Link to post
Share on other sites

As far as I am aware, banks loaning out money that customers save is not a "myth" it is the underpinnings of the banking model. All banks have a reserve requirement set by the central bank which is the difference between deposit and loans. https://en.wikipedia.org/wiki/Reserve_requirement

"The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their balance sheets"

Bank of England, May 2015.

Share this post


Link to post
Share on other sites

"The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their balance sheets"

Bank of England, May 2015.

Isn't Zopa an ILF?

Share this post


Link to post
Share on other sites

FLS was skewed to fund SME - it had aspirations towards something other than the property markets.

Except that banks who used the scheme to lend to SMEs were rewarded with multitudes of extra FLS cash, which they could do what they want with (ie, lend out as mortgages). BTL can also be classed as business lending, dependent upon which tax issue the BTLers are trying to dodge at the time...

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • Next General Election   91 members have voted

    1. 1. When do you predict the next general election will be held?


      • 2019
      • 2020
      • 2021
      • 2022

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.