Bis Comprehensive Housing Finance Report

[Time to raise the rents.]

Bank for International Settlements = BIS, for those who don't know.

Lengthy, but certainly worth a look:

http://www.bis.org/publ/cgfs26.pdf

[libitina]

TTRTR, could you summarise it for me please?

After a long afternoon of algebra, my bain is addled.

[Time to raise the rents.]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

[Smell the Fear]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

The sum total reasoning for the increase in debt seems to be:

"our risk assessment of borrowers has been massively improved by IT developments, hence we can lend much more without increasing risk"

I suspect that may return to haunt them! I have updated the extracts below with a quick translation for the less patient amongst you......

"A sudden decline in house prices or housing wealth may have a range of consequences. If a decline

is temporary and the household is not simultaneously experiencing payment difficulties, it might not

perceive any negative effects. This is unless housing is used as a short-term investment opportunity in

the current low interest rate environment, through the buy-to-let market. In this case, falling

house prices could more directly impair the household’s financial situation.

However, if home equity becomes negative, ie if the market price falls below the value of the loans,

households’ ability to move may be restricted, which may in turn reduce their ability to respond to local

labour market shocks, which would further increase vulnerability to income shocks. Moreover, if house

price declines coincide with a decline in bond markets, households may face two negative wealth

shocks, which suggests a more significant impact on consumption in this situation. The obvious

example of this is where housing finance-related risks have ultimately been transferred back to

households, for instance via pension fund investments in mortgage bonds."

I think that is a warning for you TTRTR!!

Also:

"It is also clear that recessions can be exacerbated through a downturn of the housing market. For

example, the recent housing price boom in the Netherlands clearly illustrates that the effects of shocks

are stronger when the household sector is stretched and vulnerable. Other examples of housing

downturns exacerbating broader economic downturns include the United Kingdom in the early 1990s.

The result was a significant incidence of negative equity and a sizeable upswing in home foreclosures

and repossessions.44 This contrasts with the experience so far from the most recent cycles in Australia

and the United Kingdom, where house prices have stabilised at high levels, rather than fallen

significantly, after an earlier period of rapid house price inflation."

On risks for lenders:

"Mortgage lending is generally a low-risk business as lending is based on the value of the underlying

collateral. This is also the case for countries where household debt levels have risen to historical

highs. National assessments suggest that only severe shocks in interest rates, incomes and house

prices significantly affect households’ ability to service their mortgages. Moreover, financial institutions,

in particular banks, appear sufficiently capitalised to withstand a substantial deterioration in retail credit

in severe stress scenarios, even if the recent loosening of credit standards in a number of countries

is interpreted as a sign of increased future vulnerability. However, a few caveats to this general

assessment are warranted.

Translation: everyone seems to be able to pay their debts at the moment. If there is a shock to interest rates, incomes or house prices, this may change.

First, in many countries the share of housing-related loans in banks’ portfolios is very large, in some

cases as much as 50%. Since primary mortgage markets are typically domestic, this may lead to

concentrations of lending which could leave banks, for instance specialised mortgage banks,

vulnerable to idiosyncratic shocks. This risk concentration may not be adequately captured by stress

tests, which are typically conducted for the aggregate banking sector or insurance sector.

Translation: Our stress tests may be a pile of crap given the volume of mortgage debt out there.

Second, the ultimate loss-given-default for the lender depends on the value of the collateral at the time

of resale. Thus, higher current market values need not imply that loss-given-default is lower, if there is

a risk of house prices declining in the future. Furthermore, in times of rapid growth in housing prices,

valuers (or assessors) in some cases may face greater pressure to provide non-objective valuations

(or assessments) to justify lending decisions. This is reinforced by the fact that, in aggregate, there may be a positive feedback between credit growth and house prices because of the intimate link

between mortgage lending and collateral values.

Translation: Debt is real, house prices are a matter of opinion. In a booming market, valuations for mortgage purposes may be stupid and unrealistic. As the credit bubble expands, house prices go up.

Third, the rapid growth of sub-prime markets in some countries raises the issue of the extent to which

a highly competitive housing finance environment has led to increased risk-taking. A related question

is whether giving new borrowers access to housing credit has given additional short-term support to

house prices, thereby leading to a cycle in which more lending leads to higher property prices, which

leads to lower delinquencies and thus even more lending. Sub-prime lending, particularly in the United

States, has grown rapidly in a period in which an increasing number of borrowers have taken out

interest-only or variable rate loans (including some with negative amortisation options) and in which

house prices have risen. It is worth noting that risk models of financial institutions have in many

countries not been tested in a downturn scenario featuring a rapid increase in interest rates and a

strong decline in house prices. Thus, there may be a risk that lenders are underestimating

households’ probability and severity of default. It is also questionable whether current risk models

properly address the wealth and consumer confidence effects of house price declines. This

underscores the importance of collecting housing data that enable financial institutions to manage

credit risks in a sound way.49 Another aspect is that not all countries have conducted household

surveys to collect distributional data on households.

Translation: BTL and self-cert mortgages may have been advanced without due consideration for the risk inherent in them, as the lenders are too focused on gaining market share above all else. The credit boom has pumped up prices, giving lenders and borrowers false confidence, leading to more and more lending against the same assets.

Again, the risk models we employ may be absolutely pants.

Fourth, lenders increasingly rely on capital market funding, which may be due to a combination of

rapid growth in housing finance combined with a reduction in the volume of deposits, which compels

lenders to seek alternative means of funding. It may also reflect the fact that capital market access has

lowered the funding costs for housing loan providers, thereby increasing the incentive to securitise

mortgage loans. Greater reliance on securitisation means that the risks relevant to financial institutions

are changing. Lenders can dispose of interest rate and credit risk, and concentrate instead on income

from mortgage servicing rights (so-called “packaging fees”). Hence, in principle, institutions that

package and sell loans do not need to manage credit and interest rate risks, but are instead exposed

to liquidity, operational and reputational risks. Growing dependence on financial markets has also

increased the exposure to market turbulence. One aspect of this is that, in periods of severe market

unrest or uncertainty, a whole group of housing finance lenders may suddenly find it difficult to obtain

funding. Thus, although internationally active financial institutions build up exposures to non-domestic

mortgages to diversify risks, spillover effects from foreign housing markets could become a source of

concern. Housing finance-related risks may thus ultimately be transferred back to households, for

instance via pension funds.

Translation: Lenders do not care about the credit risk of their mortgages, because they package them up and sell them back to the suckers who borrowed the money in the first place (i.e. Joe Public, the pension holder). The banks make a killing from packaging and selling the mortgages.

Edited January 23, 2006 by Smell the Fear

[29929BlackTuesday]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

Hurray!! I'm free to buy a house tomorrow! Ah brilliant TTRTR - without you I would have waited until the price I would have to wait to buy a house around here to drop (further) but NOW I see I should BUY ONE RIGHT NOW!!

Thanks Rents - you're a like the superhero 'House Price Man' (He was bitten by a radioactive baby-boomer and now has special 'Boomer Powers')

ACE!

[apom]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

hmmnnn...

rapidly dropping prices..

Still no buyers..

Oversupply of property..

and massive debt..

you do find the oddest reports TTRTR's

and if they agree with what you want to see you will say that they are spot on..

Of course no bears are guilty of that

yipeeeee....

sorry.. the crash is here...

I wasn't accurate to the month.. but every facet of my thoughts on the matter have been spot on..

Result..

Sorry...

Devon.. prices are falluing through the floor..

and heres the thing..

where as people were saying it wouldn't happen months ago..

Today they talk about it..

[See]

Housing finance-related risks may thus ultimately be transferred back to households, for

instance via pension funds.

Ah. Banks. Bunch of scallywag pirates the lot of them.

[Smell the Fear]

Ah. Banks. Bunch of scallywag pirates the lot of them.

Indeed. Those nearing retirement may be double-f*cked by a house price crash wiping out their biggest asset, and a pension fund stuffed full of junk Mortgage Backed Securities driving them into poverty.

[Smell the Fear]

Indeed. Those nearing retirement may be double-f*cked by a house price crash wiping out their biggest asset, and a pension fund stuffed full of junk Mortgage Backed Securities driving them into poverty.

I'm just bumping this up as I don't think it got the attention it deserved last night. This is a weighty review of the market globally, and there are some nice nuggets in there if you read between the lines.

It is also interesting to get the enemy's (i.e. the banking industry) view of the bubble......

[Last Hun Standing]

Thanks for posting the link.

I think it is important to try and understand alternative viewpoints and this is an informative read.

In my opinion it appears to be a fact based analysis with a lot of credibility, showing some of the risk they have identified.

The conclusions drawn will inevitably reflect the function the report is to serve. Ultimately you don't have to agree, but should always make up your own mind. Sometimes it is easier to see through the fog of emotion and self interest than others.

[CrashIsUnderWay]

Smell's analysis is brilliant - this should be pinned - it easily shows how desperate the last bull standing (TTRTRSFB) is, when he posts uberbearsish articles like the above with pathetically poor attempts at spin...

[Red Baron]

Maybe TTRTR should change his 'handle' to 'Time to Drop his Pants' ?

[Leodhasach]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

Hey everybody! Australia, Spain and the Netherlands are up to their necks in $hit - we're only up to our waists! Hooray!

[Time to raise the rents.]

Hey everybody! Australia, Spain and the Netherlands are up to their necks in $hit - we're only up to our waists! Hooray!

Now that is the summary I was looking for........

But on a serious note, yes I posted this because it is a real attempt to analyse the situation and a far cry from the banter that goes on here at the forum.

[Smell the Fear]

Now that is the summary I was looking for........

But on a serious note, yes I posted this because it is a real attempt to analyse the situation and a far cry from the banter that goes on here at the forum.

I found it interesting. It put many of the points raised on this forum into rather dry, academic language. But the underlying message is clear. There has been a credit boom which has driven up property prices. There are risks on the downside. There is no upside.

[Time to raise the rents.]

I found it interesting. It put many of the points raised on this forum into rather dry, academic language. But the underlying message is clear. There has been a credit boom which has driven up property prices. There are risks on the downside. There is no upside.

Could you do me a favour and update your sig. My places just went up 7% last week or something like that......

[crash test dummy]

The real residential house prices p.12 graph 2.5 shows the last crash and the eminent one to come very clearly.

crash - ladbrookes have stopped taking bets, dead cert.

Edited January 25, 2006 by crash test dummy

[Smell the Fear]

Could you do me a favour and update your sig. My places just went up 7% last week or something like that......

Dream on. Not even you believe that.

[Smell the Fear]

Could you do me a favour and update your sig. My places just went up 7% last week or something like that......

The latest HBOS figures indicate that Wandsworth prices have declined by 3% in the past year. Would you like me to update my sig now?

I believe that taking depreciation on your business assets into account (£105k), you made approximately

£36k last year.

This is a pretty average income for a man in London.

It is not, however, a suitable income for a man who is £2.25m in debt.......

[DavidGold]

Well the pretty graph on page 9 shows that mortgage debt in the UK hasn't grown as much as in places like Australia, Spain and the Netherlands in the period from 1994 to 2004.

Therefore my summary = no crash.

There is also a whole lot of NON-mortgage debt to add into the equation, increasing vulnerability.

[DavidGold]

All page numbers quoted below are from the report itself, not Acrobat:

I have just checked the report, and the graph on page 5 bears out my suspicions - the UK has a high and rising debt to income ratio, and the debt servicing cost in relation to income on page 6 is none too good either.

High house prices on page 8, and look at the footnote - prices have fallen in the 'Outer South East' region!

Regarding page 19, whilst long term real interest rates appear to have fallen this is for 10 year bonds, not a building society mortgage. e.g. the UK is showing a real rate of approx. 1.5%. However, with inflation at 2% and a 25 year fixed rate mortgage (Leeds & Holbeck, or Cheshire) at 5% a couple of months ago, the real rate is 3%.