Thursday, February 28, 2008

… and homeowners feel the squeeze

Banking gets back to normal after years of excess

The other alarmist speech came from Hector Sants, FSA CEO. "I don't think markets are ever going to return to the way they were. The idea that at some point they will go back to normal, I think, is a misnomer." The era of cheap borrowing, he added, was over. That cannot be right either – or rather it is only right if you assume that the past three or four years were normal. By historical standards they were most abnormal for two reasons. The primary cause was abnormally low real interest rates, as you can see from the first graph. This shows real short-term interest rates in the developed countries. That dip of real rates to below 1 per cent for five years was the result of flawed central banking policies. YEESSSSSSSS!!

Posted by confused76 @ 08:40 AM (1330 views)
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25 thoughts on “… and homeowners feel the squeeze

  • He seems to start off well but then bottles it by omitting some inconvenient facts.

    Firstly, he describes Northern Rock as a “fringe” bank. It was not. It held 20% of all UK mortgages. Harldy on the fringes really.

    Secondly, he says that “unless the Bank knows something we don’t … there has been no suggestion whatsoever of a run on a large clearing bank”. but that’s the problem. Next time another Northern Rock comes along the chances are that we won’t be told about its difficulties beforehand. The Bank has the ability to secretly lend money now as a result of rushed legislation last month. I belive this actaully creates more mistrust in savers and investors minds.

    Thirdly, he remarks “True, Continental Illinois and Nordbanken had solvency problems as well as liquidity ones”. But the whole point of the current crisis is that its about solvency, not liquidity. If it was about liquidity it would have blown over by now with another wave of the central banks’ magic money wands.

    Fourthly, he says that “The UK housing situation is not nearly as dire as it was in the early 1990s.”. That’s because hes measuring it according to the previous measure – the “Last Known Good” fallacy, that forgets that this is a culmination and result of that last known good “solution” as well! He also fails to mention the coming storm from the next exotic derivative currently being traded in vast volumes, the Credit Default Swap.

    Lastly he says that “there will be housing problems, though not as serious in the US” but fails to qualify the statement. All of the indicators are that the UK is much more overvalued than the US, and we are much more dependent on the financial markets that process these debts. In addition the falling pound has added massively to inflationary pressure as it becomes uneconomical for much of the immigrant population to stay here.

    His point about the gradual waking up of the regulatory authorities is a good one – he just paints a very patchy picture on top of it to give his POV some credence.

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  • ””The UK housing situation is not nearly as dire as it was in the early 1990s.”. ”

    He should have started ”At this point……The UK housing…etc”. This guy is just comparing something which is just starting, to the worst of a bad slump. There is absolutely no way this guy can predict what will happen in the next few years.

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  • Well I thought it was a good article, with valid points about the banking system in general and how it (hopefully) is returning back to normal. This surely is the most important thing overall, granted he didn’t hammer home the point about house prices crashing but give him credit where credit is due.

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  • The guy doesn’t even know his misnomer from his misconception!

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  • ontheotherhand says:

    Funny he talks about going back to normal. See our very own Graphs page for the Lifecycle of a Bubble. After Denial and Bull Trap, there is Return to “normal”, just before Fear, Capitulation, and Despair.

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  • It’s a remarkably sanguine commentary on the economic situation but makes several assertions without explanation. I don’t really understand what he means when he says the housing market is not as dire as in the 90s. Perhaps this is because he is looking at the abrupt events back then – dramatic changes in interest rates caused by the ERM, the house buying frenzy (and then cut-off) leading up to the end of double tax relief. But the real issue, the overvaluation of prices relative to incomes, is worse now. How this overpricing can be maintained indefinitely given current conditions is hard to imagine, but should this somehow occur, it will surely have dreadful consequences for society and, ultimately, the economy.

    It’s a bit like a big dipper paused at the top. Uncertain times indeed.

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  • “The UK housing situation is not nearly as dire as it was in the early 1990s”

    Just because you did not like this marvellous line, you slate him…. your like a bunch of kids only agreeing with what you want to believe.

    Print my prediction off, date it with todays date and i will be proved correct with the following statement:-

    by 2015 house prices will have risen 50% from todays figure.

    slate it, laugh it off, but it will happen and you guys will have lost out….

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  • @Greenbay – Spoken (well mistyped) like a true estate agent! ;D

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  • OK Greenbay – A lot of people on here would probably agree with you, as we are all painfully aware of the likelihood that the government will inflate their way out of this problem.

    I certainly agree with you (except I think it will take longer, perhaps 2020), and I am very bearish on house prices. In real terms tehy will have fallen by 2015. In nominal terms you will probably be right.

    Not sure what it is you are trying to prove here. Maybe you could elaborate?

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  • ”slate it, laugh it off, but it will happen and you guys will have lost out….”

    Worried about where you next mortgage is coming from?

    I really don’t know why you spend time putting messages on this site, have you nothing better to do, like screwing rent out of poor students?

    by 2015 house prices will have risen 50% from todays figure.

    And where exactly is this money going to come from? I can’t see wages going up that much…..borrowing? Have you seen the share price on some banks recently?

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  • Inbreda,

    Appreciate your view, but i dont believe ‘most’ people visiting this site agree that prices will increase, my feeling is the vast majority believe we are in for a big crash by quoting cycles and boom & bust theories, whilst i agree boom & bust theories have thier place when they are not being interfered with, the property market is different, is heavily relied upon and is/will be interfered with. I believe its not the economy or any cycle that is or will control house prices, i truley believe house price will be controlling the economy, and therefore house prices will/are being controlled by the government and the ‘not so independent BOE.
    I may agree there might be a slight correction in house prices by 10% but will be hardly noticed, and will only last 18 month max before steady increases. But the intervention from the government will not allow a prolonged decrease in prices the consequences will be to severe to the uk public, the economy and any government.

    I just wish people that visit this site opened thier minds to whats happening.

    IMHO

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  • theboltonfury says:

    Mr Bay, whilst you’re there, you don’t know the winner of the National this year as well do you?

    Believing what we want? Bit rich isn’t it from a guy/girl who won’t hear to the contrary that the country is crawling with foreigners looking to rent, no credit crisis, a demand/supply problem.

    Lost out, I really doubt it. It’s about as likely as you flipping burgers in 5 years………..

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  • Hpwatcher,

    youve obviously got anger/resentment issues that make you unable to see whats happening around you.

    By the way share prices are driven largely by sentiment, unlike property which has tangible worth. And if you did not notice the banks make astronomical profits and continue to do so. But like any company it has to be mananged correctly which includes risk/reward ratios which is the sole reason why Northern rock failed. Most banks will continue to rake in profits.

    ”And where exactly is this money going to come from? I can’t see wages going up that much”

    what about interest rates? what if they drop to 4%-3% as the economy slows as expected for many years to come. There are many factors other than wage inflation..

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  • Well, Greenbay, if prices stay constant adjusted for inflation (unlikely given their current level) and annual inflation turns out to be about 6%, your prediction, such as it is, will come true. No one is slating the Independent piece, just criticising the unsupported assertions.

    If anyone is to be slated on those grounds, however, it would probably be you before the papers. But then lots of people believe house prices will go up forever.

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  • bolton fany,

    Yes there is a credit crisis (albeit overhyped), yes there is a ‘general’ supply demand problem (with exception of new build flats in areas like manchester, im talking nationwide), and yes the country has seen more foreigners in this country than for many years (and these are only figures the government has captured and like us to believe).

    Did you lose out when this site was quoting a crash 5-6 years ago, yes you would have, will you lose out again, yes you will.

    ”Lost out, I really doubt it. It’s about as likely as you flipping burgers in 5 years………..”

    Hmm does not make much sense do you think im gona be flipping burgers eh?

    as far as the grand national goes, no i dont gamble, i only back houses that are being riden by tenants with the odds massively in my favour, In fact the house always wins and the gamblers lose….

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  • Again Boltonfury, while i agree with your analysis, I disagree with the timescales. I estimate the Mr Bay will be flipping burgers in less than 4 years.

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  • I agree that Greenbay is right about rises but by 2020 or so. First comes the fall and then the upswing afterwards…

    His input is valued though. Well done Greenbay WB…

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  • Banks to change their lending practices?

    To me this means that they may actually check that a borrower can actually pay back the mortgage. How quickly will the interest only option diappear. Multiples? 100% mortgages? BTL deals?

    To me this means that bonkers prices can’t continue. Why did I watch the BEEB news yesterday and listen to the Economics pundit (probably with at least an A level in business studies) go on about the consequences of banks tightening their belts, why did he not mention the possibility of house prices dropping. Surely lower multiples=lower prices as sheeple can’t afford to pay as much.

    Greenday?
    Happy day more like.
    Average house price 300k ish by 2015. Thats got to be close to 10X average earnings. Normal people can’t really afford to but now. What is going to change that???
    House prices supported at present by speculators BTL and very, very few FTB. Lose the BTL, it all falls down.

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  • just watching,
    yes 10 x wages, your right they wont be able to afford them, they will be forced to rent, the market will be owned by investors and larger corporations. so the 10x or whatever will be irrelevant.

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  • waitingfor hpc says:

    I suggest that by 2015 the UK will be a third level state in the EU – buy houses in the EU , better regulated and more affordable. And all our jobs will be there. Greenbay forgets that the MARKETS that EMPLOY the people to rent his houses will move if costs go to 10x salary.
    So IMHO opinion the UK is living in a dream – and like any dream you wake up. Oh – and for the record I own my own company and am opening a plant in Poland for 50% the cost of the UK – so as job s go so do the poeple to rent these houses.
    Greenbay smell the coffee – the BOOM IS COMING TO AN END. As a result of your greed the UK is now overpriced, overvalued and on the way down to it’s real level.

    I do fear for the UK but have no choice but to move production to meet market prices. Inflation in my firm is running at 15% so far this year …………. make your own conclusions.

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  • planning4acrash says:

    Greenbay, I suppose you expect the government to sacrifice the pound to support 10x salary mortgages for investors by putting rates to 1%? Because how could you make any yield at anywhere near today’s interest rates?! Do you really think wages will rise? Anyway, if that happens, the 20k rent you’ll get will be worth about £100,000 Euro’s, and Poland will have overtaken the UK’s economy because we will have Statzi and Mugabe style hyperinflation if your your distopia comes to pass!! You freaking FASCIST!!! You should be hung at the Tower of London for high treason against the subjects of the Queen, along with your gang of thieves. All you do is gloat, but you gloat at the turning of the tide and shall be caught with your trousers down when the water recedes.

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  • my conclusion is you manufacture huge penises, and because the market here in the UK has dried up because its full of [email protected], you’ve decided to replace all the ones that have come here from poland.

    smell coffee no.. only the stuff thats flowing from your gob 🙂

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  • Greenbay, I wonder how many Americans in a similar position to you in recent years have smugged asserted they’re the clever ones and everyone else is a fool? This quote sums you up perfectly – “In fact the house always wins and the gamblers lose….” Yeah, in a casino. The housing market isn’t one.

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  • You bitter bitter people…

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  • Wrong, house prices always win over the medium/long term….

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