The Mcglashan Answers Hamish Mctavish

[HAMISH_MCTAVISH]

BTW, I appreciate that you pointed out my omission of transactional costs for the STR on the examples I gave. So I can improve my model, what do you estimate these to be? Can you provide a breakdown?

Cheers

Approximately £1000 in solicitors and other professional fees to either buy or sell, plus marketing and home report costs on the sell side, so approx £500-£1500 for marketing, and £600 for a home report, plus stamp duty on the buy side.

So Very roughly (and it will vary a lot), but this seems about right for a 200K property for example

To Sell:

Solicitors fees £1k

Home report £600

Marketing £1000

To Buy

Solicitors fees £1k

stamp duty £2k

Total £5600. Plus moving costs of at least £500 each way, for another grand in total, or a lot more for a bigger house, or if you are trying to move a grand piano/anything else large and fragile, etc.

With regards to model, a lot will depend on rental costs as well, I've seen yields fluctuate from 4.5% to 7.5% in Aberdeen.

Therefore a cash purchaser, without the additional losses/gains of mortgage interest, would need to see annual price falls of 4.5% to 7.5% to make renting worthwhile. An STR that purchases in cash would need to see those falls, plus around 5K-6K for transactional costs.

A mortgage holder's required falls vary greatly depending on LTV, interest rate, etc, but it will likely be around half to two thirds of the cash purchasers required falls.

If I had to guess (because I can't be ar5ed working it out precisely) I would guess that based on a 5% rental yield, 3% annual falls would be needed for a 90% mortgage to break even, 4% for 50% mortgage, etc

On a 7% rental yield, 4.5% falls for a 90%, and 5.75% for a 50%, etc.....

To summarise, a big crash in a short time frame can work well for delayed purchase/STR, a small crash over a long time frame does not work, and the further in advance of the crash you actually see it coming and delay purchase for, the worse off you are and the bigger a crash you need for it to work out well for you.

[geneer]

Now that you mention it, there doesn't appear to be any occurence if this "pattern" in 2006 Hamish.

Yeah, thats what I thought you said.

[HAMISH_MCTAVISH]

The Bank will be pleased with the early results of QE, which has achieved a key aim of driving down market interest rates as ten-year gilt yields, a key factor in determining interest rates for consumers and companies, have fallen to record lows below 3.07 per cent. Yesterday, ten-year yields briefly dipped below those of German government bonds for the first time since 2002.

In another sign of success, the US Federal Reserve is thought to have been so impressed by the early results for QE that is considering similar moves.

From todays The Times.

Interesting.

[ccc]

From todays The Times.

Interesting.

What they are doing is artificially inflating the price of UK gilts. The real demand for these has dropped. As we are not a particularly great place to invest in right now. However they are printing money and buying the gilts themselves. Classic dragon eating its own tail..

So as the price rises the yield falls. Many problems with this. One - the currency is taking another battering, cost push inflation could be the next worry. If not already.

Also it may get to the point where the only people interested in buying our gilts are ourself !! if this is the case then the only way of putting money into the economy is by printing. This is why I think they have had the QE idea all along. They know there will be a point where there will be a shortage of buyers. Especially with the rest of the World selling gilts/T-Bills etc.. at record rates.

So we can't sell our debt anymore, so let's just print it and buy it ourselves !!

Anyone getting an annuity in the near future is going to be shafted - if the prices remain artificially high and push the yields down artifically low.

Anyone with any savings or relying on the interest from them will be shafted as they will be getting 2-3% if they are very lucky on some sort of bonus account. The rest will be getting 1%, if that.

The weakening of the currency has done sweet FA for exports, as we all expected. These thing stake years to have any impact, if any at all. Factories are not just suddenly going to appear in the UK overnight.

There will of course be those with tracker mortgages who are currently benefitting. Compared to those losing out though ? Not much of an impact.

All this at the time when the Government is wanting to 'get people spending again'.

They really haven't thought this through....

[The McGlashan]

Hi Hamish,

Firstly, many thanks for the info on transaction costs - very helpful.

Therefore a cash purchaser, without the additional losses/gains of mortgage interest, would need to see annual price falls of 4.5% to 7.5% to make renting worthwhile. An STR that purchases in cash would need to see those falls, plus around 5K-6K for transactional costs.

A mortgage holder's required falls vary greatly depending on LTV, interest rate, etc, but it will likely be around half to two thirds of the cash purchasers required falls.

If I had to guess (because I can't be ar5ed working it out precisely) I would guess that based on a 5% rental yield, 3% annual falls would be needed for a 90% mortgage to break even, 4% for 50% mortgage, etc

On a 7% rental yield, 4.5% falls for a 90%, and 5.75% for a 50%, etc.....

To summarise, a big crash in a short time frame can work well for delayed purchase/STR, a small crash over a long time frame does not work, and the further in advance of the crash you actually see it coming and delay purchase for, the worse off you are and the bigger a crash you need for it to work out well for you.

I've run the numbers on your above estimates, and they're pretty much spot on. Excellent.

So, to put it another way, an annual house price fall of 5.75% and up makes renting the more attractive option for those who would otherwise need to become mortgage borrowers to put a roof over their heads.

Good grief! Annual house price falls of just 5.75% mean that paying interest to a mortgage provider is "dead money"! I hadn't thought it was anything like as low a figure as that. So many thanks to you working it out.

Your own prediction of a further 7% fall over the next 9 months is significantly larger than a 5.75% annual fall. I am not alone in reckoning that house price falls will be steeper and continue for longer than your prediction, and, similarly, I believe that a 5% long term average mortgage interest is an over-optimistically small estimate.

Renters are winners in your scenario, and increasingly so the more bearish the scenario. To acquiesce to a 7% drop over 9 months is to is to provide a disincentive to borrowing and therefore provoke a larger drop: reflexivity, d'you see?

WRT your reveling in QE, I'll second ccc's comments and (at the risk of repeating myself) add that the desired result from QE is to help mitigate a worsening and accelerating contraction of the economy, and help allow potential for a quicker return to GDP growth when the conditions for that growth eventually return. There is no mention of the housing market whatever in the BoE's press release, nor in the correspondence between Treasury and Bank on the subject of QE.

QE, 'the last bullet in the gun', is not an attempt to engineer a soft-landing for the economy, rather, it's a desperate bid to ensure that the crash is somewhere near the airfield. QE is nothing to get too excited about (quite the reverse: it's an indication of what poor shape we're in), it's just more monetarism. What is arguable is whether monetarist measures can do anything to affect the velocity of money in a potentially deflationary environment, or whether it's just "pushing on a string" per Keynes.

There is also a significant risk of unintended consequences - the dynamics of complex systems almost guarantees this. Turbulence is now the prominent regime in just about all asset and commodity markets: volatility reigns, and any attempt to drive or dampen the oscillations will, inevitably, make the fluctuations worse. The markets will return to stability of their own volition. However - it is inherently impossible to predict with certainty when that stability will come and what that stability will look like.

Edited March 12, 2009 by The McGlashan

[HAMISH_MCTAVISH]

*snip*

I can't believe both yourself and CCC missed the relevant part of the QE post..... Or possibly just ignored it in favour of a more general anti-QE/we're all doomed diatribe.

I'll narrow it down for you.

which has achieved a key aim of driving down market interest rates as ten-year gilt yields, a key factor in determining interest rates for consumers and companies

In other words, market interest rates to reduce soon. It does no good for BOEBR be at 0.5% when FTB's are still getting sold mortgages at closer to 5%....

Interest rates can and do impact the housing market, but cannot have an positive effect when in all practical terms they are more expensive today than they were in 2007.

Increasing the quantity of money available to the banks to lend is needed to push down the price of that money. At first glance, it's working.

[HAMISH_MCTAVISH]

Hi Hamish,

Firstly, many thanks for the info on transaction costs - very helpful.

I've run the numbers on your above estimates, and they're pretty much spot on. Excellent.

So, to put it another way, an annual house price fall of 5.75% and up makes renting the more attractive option for those who would otherwise need to become mortgage borrowers to put a roof over their heads.

Good grief! Annual house price falls of just 5.75% mean that paying interest to a mortgage provider is "dead money"! I hadn't thought it was anything like as low a figure as that. So many thanks to you working it out.

Your own prediction of a further 7% fall over the next 9 months is significantly larger than a 5.75% annual fall. I am not alone in reckoning that house price falls will be steeper and continue for longer than your prediction, and, similarly, I believe that a 5% long term average mortgage interest is an over-optimistically small estimate.

Renters are winners in your scenario, and increasingly so the more bearish the scenario. To acquiesce to a 7% drop over 9 months is to is to provide a disincentive to borrowing and therefore provoke a larger drop: reflexivity, d'you see?

You're welcome. Any more of your arguments you'd like me to make a case for?

However, in all seriousness, I think theres a couple of things you've overlooked....

Housing is not typically a short term investment. Housing prices can and do fluctuate. To give you a comparison, I used to own some shares through a company share program, and over the course of around 4 years, the share price ranged from around £2.50 to just over £5. There were many points in that time frame where the shares lost 10% or even 20% of their value in a short term, depending on seasonal variances, profit reporting, etc. I didn't sell those shares every time I knew we were going to have a bad quarter, and then buy them back cheaper later. Apart from the obvious insider trading issues, I just couldn't be ar5ed, as I knew they would increase over the long term.

Day trading the stock markets is a very risky business. Many people can, and have, lost their shirt (even their house)doing it. Buying a good blue chip share and holding for the long term is much less risky. Short term property speculation is similarly risky, and similarly able to destroy wealth in short order. But property speculation is not limited to those who buy and flip. Delayed purchase and STR are equally property speculation. It's the equivalent of shorting the market with stocks, but it can also go horribly and expensively wrong if the market defies your expectations, or even worse, does what you think but takes too long to do it.

There will be many people in Aberdeen who saw this website in 2004/5/6/7 who may have delayed purchase, and for whom this crash will almost certainly now prove to be too little too late. As for those who bought in 2008, we need to see what the annualised falls are every month, but if it's more than 7.5%, they're guaranteed to be financially worse off, If it's less than 3%, they're guaranteed to be better off, and if it's in between it will depend on their mortgage rate and LTV.

However in all cases, a person that buys at the absolute peak of the market, and holds for 25 years, is far, far better off than a person that doesn't buy, and rents for 25 years instead. Like many things in life, it's really all down to risk, and how much risk any one individual is willing to accept.

Edited March 12, 2009 by HAMISH_MCTAVISH

[The McGlashan]

I can't believe both yourself and CCC missed the relevant part of the QE post..... Or possibly just ignored it in favour of a more general anti-QE/we're all doomed diatribe.

I'll narrow it down for you.

In other words, market interest rates to reduce soon. It does no good for BOEBR be at 0.5% when FTB's are still getting sold mortgages at closer to 5%....

Interest rates can and do impact the housing market, but cannot have an positive effect when in all practical terms they are more expensive today than they were in 2007.

Increasing the quantity of money available to the banks to lend is needed to push down the price of that money. At first glance, it's working.

There is much more to it than that.

Inflation expectations fall sharply - FT

"

“What we are seeing right now in terms of wages – the cuts at Toyota and today’s announcement of a pay freeze at BT –- are clear signs of just how close the UK is to slipping into a period of deflation,” said Colin Ellis, an economist at Daiwa Securities SMBC.

The inflation attitudes survey showed that 7 per cent of respondents thought prices had fallen in the last 12 months – the highest proportion since May 2003. Meanwhile, 27 per cent expect prices to fall or remain the same over the next 12 months, the highest level since the survey began.

"

http://www.ft.com/cms/s/0/19a08a22-0ef1-11...00779fd2ac.html

CML bemoans poor interest rates for savers.

"

This latest [bOE] cut presents immense challenges for lenders whose margins are already squeezed as a result of previous reductions, leaving little scope to lower discretionary mortgage rates further.

Savings are the lifeblood of mortgage lending, and unless lenders can offer competitive rates to savers their ability to offer new mortgages is restricted.

"

http://www.cml.org.uk/cml/media/press/2166

[ccc]

Hamish - please open your eyes to the bigger picture !!

So it 'appears' this QE is working. You worked out what the most important word is in your statement ?

'Appears'

Everything Broon puts his hand to 'appears' to be working - that is until it blows up in all our faces.

The interest in our debt is faltering - so we are buying it ourself. As I said the Dragon eating it's own tail. You know what happens eventually to that Dragon......it finally gets to its own head.

So what happens when the market loses all interest in UK Gilts ? Yes we have no choice but to continue pursuing QE as there is no other way. The pound loses even more value, cost push inflation occurs, wage inflation cannot occur because businesses here are in enough trouble as it is. This already appears to be happening. Wages are doing anything but going up.

Every day we get closer and closer to an Iceland, Argentina or even Zimbabwe type situation. I hope it doesn't get that far but Broon is doing his best to ensure it does.

And you think this all 'appears' to be working

Because yields are being pushed lower by artificially inflating the price of bonds even though nobody else wants them ?!! And all this with money created out of thin air.

Seriously man - open your eyes. House prices in Aberdeen should be the least of your worries. This is a destruction of our economy. The likes of even a doommonger like myself didn't think would occur.

I am getting closer and closer to just biting the bullet and going for the big shiny G.

[The McGlashan]

Hamish - please open your eyes to the bigger picture !!

So it 'appears' this QE is working. You worked out what the most important word is in your statement ?

'Appears'

Everything Broon puts his hand to 'appears' to be working - that is until it blows up in all our faces.

The interest in our debt is faltering - so we are buying it ourself. As I said the Dragon eating it's own tail. You know what happens eventually to that Dragon......it finally gets to its own head.

So what happens when the market loses all interest in UK Gilts ? Yes we have no choice but to continue pursuing QE as there is no other way. The pound loses even more value, cost push inflation occurs, wage inflation cannot occur because businesses here are in enough trouble as it is. This already appears to be happening. Wages are doing anything but going up.

Every day we get closer and closer to an Iceland, Argentina or even Zimbabwe type situation. I hope it doesn't get that far but Broon is doing his best to ensure it does.

And you think this all 'appears' to be working

Because yields are being pushed lower by artificially inflating the price of bonds even though nobody else wants them ?!! And all this with money created out of thin air.

Seriously man - open your eyes. House prices in Aberdeen should be the least of your worries. This is a destruction of our economy. The likes of even a doommonger like myself didn't think would occur.

I am getting closer and closer to just biting the bullet and going for the big shiny G.

Hi ccc,

Personally I hope that QE works to help the economy find a way to recover. It is, however, misguided if anyone believes that it will boost house prices. For instance, even if the entire £75bn (over the next 3 months) of new QE money makes its way into the mortgage market this year, it will not even come close to reversing the approx 50% YoY decline being seen in that market.

In that context the amounts of new mortgage lending being promised by NR and RBS (which Hamish has also hailed) are laudable but laughable.

[The McGlashan]

You're welcome. Any more of your arguments you'd like me to make a case for?

However, in all seriousness, I think theres a couple of things you've overlooked....

Housing is not typically a short term investment. Housing prices can and do fluctuate. To give you a comparison, I used to own some shares through a company share program, and over the course of around 4 years, the share price ranged from around £2.50 to just over £5. There were many points in that time frame where the shares lost 10% or even 20% of their value in a short term, depending on seasonal variances, profit reporting, etc. I didn't sell those shares every time I knew we were going to have a bad quarter, and then buy them back cheaper later. Apart from the obvious insider trading issues, I just couldn't be ar5ed, as I knew they would increase over the long term.

Day trading the stock markets is a very risky business. Many people can, and have, lost their shirt (even their house)doing it. Buying a good blue chip share and holding for the long term is much less risky. Short term property speculation is similarly risky, and similarly able to destroy wealth in short order. But property speculation is not limited to those who buy and flip. Delayed purchase and STR are equally property speculation. It's the equivalent of shorting the market with stocks, but it can also go horribly and expensively wrong if the market defies your expectations, or even worse, does what you think but takes too long to do it.

There will be many people in Aberdeen who saw this website in 2004/5/6/7 who may have delayed purchase, and for whom this crash will almost certainly now prove to be too little too late. As for those who bought in 2008, we need to see what the annualised falls are every month, but if it's more than 7.5%, they're guaranteed to be financially worse off, If it's less than 3%, they're guaranteed to be better off, and if it's in between it will depend on their mortgage rate and LTV.

However in all cases, a person that buys at the absolute peak of the market, and holds for 25 years, is far, far better off than a person that doesn't buy, and rents for 25 years instead. Like many things in life, it's really all down to risk, and how much risk any one individual is willing to accept.

Hamish,

Some have characterised having a discussion with you as "like arguing with a 3-year old". They are wrong.

You project the appearance of being a well-informed pundit on the property market and the Aberdeen economy. You have provided intricate arguments in support of your belief that the house price decline in Aberdeen will be shallower and shorter than the prevailing point of view.

Some of these arguments, however, once dissected, have be shown to rely on faulty, out-of-date or incomplete information or assumptions. Some of your statements are demonstrably false, as we have shown between us over the last few days.

When I have engaged with you on your own terms, and and we have both shown that your own predictions have invalidated some of your statements (and, indeed, therefore your predictions undermine themselves), you do not even show the grace to acknowledge this fact.

Meantime, the litany of uncontroversial downside economic data continues to lengthen, which, similarly, you do not acknowledge. Instead, you characterise those of us who point it out to you as "doom-and-gloom"-mongers, which we largely are not. When we post something which really challenges you, you often resort to personal abuse, innuendo and obloquy.

Then you fall back upon one of your last remaining articles of faith - QE - and will brook no argument against it, despite the fact that the press is full of dissenting opinion which is easy to find and despite the fact that the drop in mortgage lending dwarfs the whole amount of new money being created by QE.

Then, at last, you muddy the water by changing the subject: You compare housing to stocks and shares; you engage the drive on your time machine to criticise those who have not bought in the past; you compare house purchase to renting over 25 years.

So, no, arguing with you is not like arguing with a 3-year old. It's much more like demonstrating the fossil record to a creationist.

"...But God put those bones there to test our faith!"

[ccc]

Hi ccc,

Personally I hope that QE works to help the economy find a way to recover. It is, however, misguided if anyone believes that it will boost house prices. For instance, even if the entire £75bn (over the next 3 months) of new QE money makes its way into the mortgage market this year, it will not even come close to reversing the approx 50% YoY decline being seen in that market.

In that context the amounts of new mortgage lending being promised by NR and RBS (which Hamish has also hailed) are laudable but laughable.

But has QE ever worked before ? There is one example where it didn't lead to ruin. However it just had no impact at all. All the other examples led to serious inflation.

I have no faith that Broon and co will keep a lid on things. That is my main worry about it. If there is any sign it is 'working' you can be sure they will just crank it up even more. I simply don't think they will be able to stop.

The effect on UK Gilts will be bad. It already is. Artificial prices have to hit reality eventually !! As for what that will lead to who knows.

It seems Broon is on a quest to give the UK low interest rates forever. I don't think the dangers of what attempting this have even crossed his mind. Listen to him every time he is on TV. Low interest rates seems to be etched across his entire brain.

I am still in limbo between what I expect to see. Maybe this QE will fail to quash the money/credit/whatever that is currently being destroyed in the system. Maybe it will go too far and we will get serious inflation. Maybe it wont work and we get continued deflation.

I am not sure. In fact I don't reckon anyone is !!

[HAMISH_MCTAVISH]

Hi ccc,

Personally I hope that QE works to help the economy find a way to recover. It is, however, misguided if anyone believes that it will boost house prices. For instance, even if the entire £75bn (over the next 3 months) of new QE money makes its way into the mortgage market this year, it will not even come close to reversing the approx 50% YoY decline being seen in that market.

In that context the amounts of new mortgage lending being promised by NR and RBS (which Hamish has also hailed) are laudable but laughable.

Well yes, that is all partly true, however I think your perspective on the numbers is slightly off.

Mortgage lending at peak was around 250 billion.

Mortgage lending today, without any of the QE money, NR/RBS/Lloyds, other initiatives, etc, is approx 125 Billion.

So, the numbers required are fairly clear....

125 Billion exists already. NR/RBS/Lloyds = another 20 billion or so this year, for a total of 150 Billion. This then requires that over 12 months, another 100 Billion is found......

BUT, national prices have on average already reduced by 25%. Therefore, peak lending figures are no longer required to halt the decline and start a reversal. More like 75% now, and less, perhaps 70% in another 3-4 months. So the actual number is now more like 50-60 Billion.

The BOE has been authorised to spend between 75 Billion and 150 Billion over the next three months alone. There is no reason this cannot and will not be repeated as often as required until it works. In the context of looking at a total QE spend of several hundred Billion over the next year or more, there is no reason to suggest that somewhere between 50 and 100 billion would not end up in funding for the banks, a large part of which will no doubt be used for mortgage lending.

But realistically, the current mortgage lending shortfall in order to stop declines, is only 50-60 billion. So out of the 150 billion already approved to stimulate lending, only one third has to end up as mortgages..... I don't know that I would bet against that happening, what with an election due and all.

Once the economy, and asset prices, have stabilised, and the falls have ceased, then it will be much easier for banks to attract funding from the markets. QE does not have to entirely fund the mortgage market, it just has to have enough of an impact to halt the declines, at which point the recovery begins, and banks can attract funding from normal sources.

If 50% of mortgage funding has reduced national average prices by 25%, and Aberdeen prices by 7%.....

Then what will 65% funding, or 75% funding, or 90% funding do to prices..... Thats the key question.

100% of 2007 funding is not required to stop declines, and start a reversal. IMO, 75% would do the trick nicely.

Edited March 12, 2009 by HAMISH_MCTAVISH

[The McGlashan]

Well yes, that is all partly true, however I think your perspective on the numbers is slightly off.

Hamish, it'd be better if you were sure of the your own figures before criticizing my perspective on them. You can get accurate statistics from the CML website.

Mortgage lending at peak was around 250 billion.

No, that's not right.

The 2007 figure was £363.7 bn, £1.5 bn up on 2006. This fell to £257.5 bn in 2008, and figures so far in 2009 show a 50% YoY decline.

100% of 2007 funding is not required to stop declines, and start a reversal. IMO, 75% would do the trick nicely.

OK, let's use your assumption.

So...

75% of £363.7 bn = £272.75 bn

Mortgage lending today, without any of the QE money, NR/RBS/Lloyds, other initiatives, etc, is approx 125 Billion.

Fine, agreed. But this is a 66% decline from peak.

125 Billion exists already. NR/RBS/Lloyds = another 20 billion or so this year, for a total of 150 Billion.

No, that's not wholly accurate.

NR has committed to £5bn of new mortgage lending in 2009.

RBS £9bn

Lloyds has pledged just £3bn.

Total commitment from these institutions = £17bn

Therefore...

Total potential mortgage lending for 2009 = £142bn

The shortfall from your target figure (75% of peak lending) is therefore

£272.75 bn minus £142 bn = £130.75 bn

The BOE has been authorised to spend between 75 Billion and 150 Billion over the next three months alone. There is no reason this cannot and will not be repeated as often as required until it works.

Again, not correct. The BoE has been specifically authorised to spend £75 bn over the next 3 months. There is no indication of when the remaining £75 bn will be released, but it won't be before June.

In the context of looking at a total QE spend of several hundred Billion over the next year or more, there is no reason to suggest that somewhere between 50 and 100 billion would not end up in funding for the banks, a large part of which will no doubt be used for mortgage lending.

But realistically, the current mortgage lending shortfall in order to stop declines, is only 50-60 billion. So out of the 150 billion already approved to stimulate lending, only one third has to end up as mortgages..... I don't know that I would bet against that happening, what with an election due and all.

These are controversial statements, full of out-on-a-limb questionable assumptions, but let's allow them.

If we then examine your assumptions in the light of the corrected shortfall figure we can see that "somewhere between 50 and 100 billion" funding the banks (even if all - not the one third you suggest - that money were to be used for mortgages) is simply enough to reach your target figure of 75% of peak lending, which we have now shown would require an injection of £130 bn (a figure of between 260% and 220% of your suggested £50 - £60 bn).

If 50% of mortgage funding has reduced national average prices by 25%, and Aberdeen prices by 7%.....

Then what will 65% funding, or 75% funding, or 90% funding do to prices..... Thats the key question.

Corrections:

34% of mortgage funding has reduced national average prices by 21%, and Aberdeen prices by 8.5%

It is indeed the key question - what will be achieved through increased funding levels? And what increases are possible?

.....Were all other things equal, which they most certainly are not.

[HAMISH_MCTAVISH]

Hamish, it'd be better if you were sure of the your own figures before criticizing my perspective on them. You can get accurate statistics from the CML website.

No, that's not right.

The 2007 figure was £363.7 bn, £1.5 bn up on 2006. This fell to £257.5 bn in 2008, and figures so far in 2009 show a 50% YoY decline.

OK, let's use your assumption.

So...

75% of £363.7 bn = £272.75 bn

Fine, agreed. But this is a 66% decline from peak.

No, that's not wholly accurate.

NR has committed to £5bn of new mortgage lending in 2009.

RBS £9bn

Lloyds has pledged just £3bn.

Total commitment from these institutions = £17bn

Therefore...

Total potential mortgage lending for 2009 = £142bn

The shortfall from your target figure (75% of peak lending) is therefore

£272.75 bn minus £142 bn = £130.75 bn

Again, not correct. The BoE has been specifically authorised to spend £75 bn over the next 3 months. There is no indication of when the remaining £75 bn will be released, but it won't be before June.

These are controversial statements, full of out-on-a-limb questionable assumptions, but let's allow them.

If we then examine your assumptions in the light of the corrected shortfall figure we can see that "somewhere between 50 and 100 billion" funding the banks (even if all - not the one third you suggest - that money were to be used for mortgages) is simply enough to reach your target figure of 75% of peak lending, which we have now shown would require an injection of £130 bn (a figure of between 260% and 220% of your suggested £50 - £60 bn).

Corrections:

34% of mortgage funding has reduced national average prices by 21%, and Aberdeen prices by 8.5%

It is indeed the key question - what will be achieved through increased funding levels? And what increases are possible?

.....Were all other things equal, which they most certainly are not.

Ha!!!!! You're absolutely correct re the mortgage figures. That'll teach me to check sources instead of relying on gossip in the main page threads.

Fair play, I was totally wrong on that one.

I will re-examine my assumptions and revert. My gut tells me theres something not quite right about those stats though, as a universal 66% fall in funding should already have caused a far faster and steeper drop than we have seen so far, particularly in Scotland.

If I had to guess, I'd say the most likely explanation would be the split between new mortgage lending (which has a large influence on house prices) and existing mortgage refinance (which is generally irrelevant to prices). Do you have a ready source to see if both types of mortgage lending fell equally?

There may also be a Scotland/England divide in terms of lending percentage falls and availability, and one would expect those markets with the highest incomes to fare best from the national mortgage rationing, provided there was still availability of housing stock within reasonable salary multiples, which many areas of Scotland have.

[tomwatkins]

Ha!!!!! You're absolutely correct re the mortgage figures. That'll teach me to check sources instead of relying on gossip in the main page threads.

Fair play, I was totally wrong on that one.

I will re-examine my assumptions and revert. My gut tells me theres something not quite right about those stats though, as a universal 66% fall in funding should already have caused a far faster and steeper drop than we have seen so far, particularly in Scotland.

If I had to guess, I'd say the most likely explanation would be the split between new mortgage lending (which has a large influence on house prices) and existing mortgage refinance (which is generally irrelevant to prices). Do you have a ready source to see if both types of mortgage lending fell equally?

There may also be a Scotland/England divide in terms of lending percentage falls and availability, and one would expect those markets with the highest incomes to fare best from the national mortgage rationing, provided there was still availability of housing stock within reasonable salary multiples, which many areas of Scotland have.

I won't give up Mr. McTavish. I have asked you on every HPC thread that I have seen your name this question. You never answer it as I presume you don't know the answer.

Here goes again. I hate capitals but maybe it will get your attention.

WHAT AFFECT WILL CDS'S (WRITEDOWNS) HAVE ON THE BALANCE SHEETS OF ALL UK BANKS IN THE COMING YEARS AND HOW WILL THIS AFFECT THEIR CAPITAL RATIOS AND THEREBY THEIR ABILITY TO LEND, NOT JUST FOR PROPERTY BUT ANY OTHER LENDING??????This has not been addressed in any meaningful way in the media but my take is that the provision for writing these down is being factored in at an alarming rate by all the major banks in the UK and is the reason they are building their capital ratios up like crazy. If my assumption is incorrect, what do you feel is the reason they are holding on to government (taxpayer) funds currently being injected in to the system?

[The McGlashan]

The Bank will be pleased with the early results of QE, which has achieved a key aim of driving down market interest rates as ten-year gilt yields, a key factor in determining interest rates for consumers and companies, have fallen to record lows below 3.07 per cent. Yesterday, ten-year yields briefly dipped below those of German government bonds for the first time since 2002.

In another sign of success, the US Federal Reserve is thought to have been so impressed by the early results for QE that is considering similar moves.

From todays The Times.

Interesting.

From the very same article:

"

But uncertainty persisted over just how effective the scheme will prove, as the Bank secured no bids in the first, non-competitive, phase of its auction. This involved inviting investors, other than mainstream banks, such as pension funds, to sell gilts, at a price to be set in the later competitive part of the auction, to banking groups.

Economists put the failure down to teething problems such as the speed at which the paperwork for bids had to be completed. But if these issues persist it could impede the QE plan.

There are worries that if cash-strapped banks take the lion's share of the new cash, they may hoard it, rather than lend it, undermining any boost to the economy.

So, the Bank hopes to bypass banks by buying assets from other investors, infusing the money into the economy more directly. This part of the plan could be scuppered if non-bank institutions fail to take part.

"

Which rather chimes with tomwatkins question.

Moving on, I appreciate your mea culpa on the QE calcs. Thankyou.

And I think I can help you with this:

a universal 66% fall in funding should already have caused a far faster and steeper drop than we have seen so far, particularly in Scotland.

This has manifested itself in the precipitous drop in volumes.

ASPC stats on volume:

Q4 07 = 1662 sales completed

Q4 08 = 894 sales completed

= 46% YoY decline

and a 64% decline from the Q2 07 peak of 2026 sales completed.

These volume figures declines show a pretty close correlation with the lending figures declines.

The fact that prices have not fallen at a faster and steeper rate is simply due to the "Wile E Coyote effect": denial and out-of-date expectations from vendors. Behavioral economics, innit?

It is a well know fact that the folk around here are particularly thrawn. Prices have fallen at a slower rate because of both this and the "North Sea Bubble" of 2007/8. That bubble has now been pricked. Double-digit % price declines have not arrived in Aberdeen yet - but they're in the post.

Edited March 13, 2009 by The McGlashan

[drrayjo]

The McGlashan; I salute you!

[tomwatkins]

From todays The Times.

Interesting.

From the very same article:

"

But uncertainty persisted over just how effective the scheme will prove, as the Bank secured no bids in the first, non-competitive, phase of its auction. This involved inviting investors, other than mainstream banks, such as pension funds, to sell gilts, at a price to be set in the later competitive part of the auction, to banking groups.

Economists put the failure down to teething problems such as the speed at which the paperwork for bids had to be completed. But if these issues persist it could impede the QE plan.

There are worries that if cash-strapped banks take the lion's share of the new cash, they may hoard it, rather than lend it, undermining any boost to the economy.

So, the Bank hopes to bypass banks by buying assets from other investors, infusing the money into the economy more directly. This part of the plan could be scuppered if non-bank institutions fail to take part.

"

Which rather chimes with tomwatkins question.

Moving on, I appreciate your mea culpa on the QE calcs. Thankyou.

And I think I can help you with this:

This has manifested itself in the precipitous drop in volumes.

ASPC stats on volume:

Q4 07 = 1662 sales completed

Q4 07 = 894 sales completed

= 46% YoY decline

and a 64% decline from the Q2 07 peak of 2026 sales completed.

These volume figures declines show a pretty close correlation with the lending figures declines.

The fact that prices have not fallen at a faster and steeper rate is simply due to the "Wile E Coyote effect": denial and out-of-date expectations from vendors. Behavioral economics, innit?

It is a well know fact that the folk around here are particularly thrawn. Prices have fallen at a slower rate because of both this and the "North Sea Bubble" of 2007/8. That bubble has now been pricked. Double-digit % price declines have not arrived in Aberdeen yet - but they're in the post.

The McGlashan

Good research. Thank you-very informative. I hate to keep banging the CDS drum but I honestly believe that this is the real ticking time-bomb, very rarely discussed because it is such a huge scary problem. Barclays hold (I think) 2.7T pounds of the stuff according to their last filing, but spout the usual crap that they have equivalent counter-party risk. OK if the counter-party is not a Lehman or an AIG but we all know that this is not so. By Barclays own admission a 1% fall in the underlying price of this asset class and it's game over for them. Yes a mere 1%.

[tomwatkins]

The McGlashan

Good research. Thank you-very informative. I hate to keep banging the CDS drum but I honestly believe that this is the real ticking time-bomb, very rarely discussed because it is such a huge scary problem. Barclays hold (I think) 2.7T pounds of the stuff according to their last filing, but spout the usual crap that they have equivalent counter-party risk. OK if the counter-party is not a Lehman or an AIG but we all know that this is not so. By Barclays own admission a 1% fall in the underlying price of this asset class and it's game over for them. Yes a mere 1%.

Hamish

I follow Fed news here in the US very carefully. Your quote that the Fed is considering QE is poppycock. They have already tried it in other forms over the last few months. Result? The injected money was not "taken up" by the banks in any meaningful way and actually came back to the Fed "unused" to quote the Atlanta Fed Chairman. In other words, the banks didn't take it up-they don't want to lend at low rates. There is simply no margin and too much risk. Low rates don't work for the very reason that banks cannot make money.

[HAMISH_MCTAVISH]

I hate to keep banging the CDS drum

Really? Nooooooo.......

but I honestly believe that this is the real ticking time-bomb, very rarely discussed because it is such a huge scary problem. Barclays hold (I think) 2.7T pounds of the stuff according to their last filing, but spout the usual crap that they have equivalent counter-party risk. OK if the counter-party is not a Lehman or an AIG but we all know that this is not so. By Barclays own admission a 1% fall in the underlying price of this asset class and it's game over for them. Yes a mere 1%.

Yes look, I get it, you're concerned.

I've read both sides of the argument on the main page, either it's an economic holocaust waiting to happen or it's no big deal as the counter party risks more or less balance things off.

I don't know enough about the CDS market to comment, so I don't.

[The McGlashan]

The McGlashan

Good research. Thank you-very informative. I hate to keep banging the CDS drum but I honestly believe that this is the real ticking time-bomb, very rarely discussed because it is such a huge scary problem. Barclays hold (I think) 2.7T pounds of the stuff according to their last filing, but spout the usual crap that they have equivalent counter-party risk. OK if the counter-party is not a Lehman or an AIG but we all know that this is not so. By Barclays own admission a 1% fall in the underlying price of this asset class and it's game over for them. Yes a mere 1%.

Indeed tomwatkins, and thanks.

CDS.

"I think I saw something nasty in the woodshed - if we ignore it it might go away."

Will Hutton tends to bring it up quite a lot, both on TV / radio and in his regular outings in The Economist.

Edited March 13, 2009 by The McGlashan

[HAMISH_MCTAVISH]

In other words, the banks didn't take it up-they don't want to lend at low rates. There is simply no margin and too much risk. Low rates don't work for the very reason that banks cannot make money.

Which is fundamentally untrue.

It makes no difference to a bank whether they borrow money at 1% and lend it at 3%, borrow it at 3% and lend it at 5%, or borrow money at 5% and lend it at 7%.

The last time I checked, average bank margin on UK mortgage lending had actually increased by almost 1% in the last year, despite record low base rates.

[The McGlashan]

The McGlashan; I salute you!

Many Thanks!

[ccc]

Which is fundamentally untrue.

It makes no difference to a bank whether they borrow money at 1% and lend it at 3%, borrow it at 3% and lend it at 5%, or borrow money at 5% and lend it at 7%.

The last time I checked, average bank margin on UK mortgage lending had actually increased by almost 1% in the last year, despite record low base rates.

And how many have customers on trackers with no collar ? These are loss makers for banks. The margin on these will be negative. Which is probably why they are upping their rates and LTV's for many other loans. Covering their losses in the tracker market.

Who knows. One thing is clear though - RISK AVERSION is the name of the game these days.

For every single Bank, even the part/full nationalised ones.