Sunday, December 14, 2014

Stress Fest

Assets collapse, loans go bad … Britain’s banks brace for a serious stress test

Simulated ‘market tantrum’ likely to be the first of an annual event under Bank of England’s new regulatory regime: House prices fall by an unprecedented 35% and base rates jump above 4%, putting pressure on household finances already feeling the pain of falling real incomes. Unemployment doubles to 12% and inflation rockets in an economy being buffeted by a sharp drop in the value of the pound. In the worst slump in almost a century, Foresight or fiction?

Posted by debtserf @ 09:14 PM (5433 views)
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16 thoughts on “Stress Fest

  • As we speak, 2yr Gilts are trading at 0.468%, just broken a key support level looking set to HALVING to at least 0.2%.

    THIS IS what will FORCE BOE to slash rates to 0.25%.

    BUT, the oil collapse is further than all expectations and we already have sub 1% inflation penned in for the spring, and so deflation WILL occur if the oil price collapse continues and we will most likely see negative rates going forward. The result is that interest payments will become income, and we will see governments both paying down debt and providing sweeping TAX CUTS, as the next economic stimulus.

    We will also see home loan costs plummet from these record lows.

    House prices should start booming again after the election once the Tories come in with a whopping majority.

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  • The irony is that if there are stringent stress tests on the banks then that means the lending will not be sufficiently mental to cause a bubble/crash, hence the stress test (over time) appears not to be needed (or is seen as unfairly “stopping banks from helping people get on the property ladder”)… then the lending goes over the top etc etc we know the rest

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  • The generals are always preparing for the last war.

    I suspect the next crisis will therefore not come from property or banking – at least not directly.

    Sanctions against Russia have ended the flow of Russian money into other parts of the world; the freeze on the Russian banking system is causing a massive economic contraction and the collapse in oil is the last part of the jigsaw to cause a major change in world financial flows.

    My bet: many of those oligarchs who borrowed in against their new-found oil-wealth are now cripplingly underwater. Suddenly all those things they thought were a great idea during the good times – like London property – are things they now have to get out of.

    My wager is for “decapitation” of the UK property market – the top end of which isn’t financed by domestic/Sterling mortgage debt and is finance by foreign buyers who may or may not have debts back home.

    Stand by. Just five years after the last crisis, here comes a new one – and most likely the bankers will not have prepared for it in their stress tests. (You could count it as 3, 5 or 7 years – so I chose 5 as it’s in the middle.)

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  • Now the USA have passed the Ukraine Freedom Support Act of 2014, they have all but in name declared that they are planning war with Russia. So I concur with Sneaker about Russian money drying up. Whereas central London is a separate market, like all other markets it feeds into the house price indices. Therefore, if there is a decline in foreign investment and downward pressure on central London prices this will feed through to negative house price monthly changes. As house prices are so high within 50 miles of London, it will take little to change sentiment into reverse.

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  • “House prices should start booming again etc”

    I’ve now seen two reports where it is suggested that the newly increasing housing supply is already starting to moderate house prices. We still have chronic shortages and it’s very early days in the supply ramp up, so this suggests that house prices are very sensitive to supply and that the era of above inflation increases in house prices is coming to an end.

    It is now a certainty that housing supply will continue to pick at an increasing rate for the next few years. Anyone who thinks that house prices will start ‘booming again’ is therefore living on planet cuckoo. As this year is coming to an end, I’m going to make the call that house prices will be slightly lower than they are now, in real terms, by the end of 2016. I’m fairly sure of it.

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  • I have to say that Flashman, although he comes in for a lot of criticism, seems to be the most measured in his assessments on here.

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  • House prices should start booming again after the election once the Tories come in with a whopping majority.

    Lot of wishful thinking there Libby. The Tories didn’t get a majority last time, what makes you think this will happen next year?

    All the people I know that voted conservative last time, have virtually sworn they will vote UKIP in 2015. Personally, I see a three party split. The age of single party government is well and truly over.

    UK Government want high house prices – that’s very clear. BUT I guess it depends on how much tinkering they can afford to do.

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  • Just to quantify future house price moderation then falls…

    At current population growth rates, we’ll need 165,000 new houses to once again start to improve the people to houses ratio. We won’t be too far off that in 2015 and we’ll exceed it in 2016. Current house prices are propped up by the shortages being leveraged by speculators. Once we approach supply equilibrium the speculator problem goes away and prices fall.

    Now, it might seem greedy that everyone quotes targets of over 200,000 houses but that’s because we have accumulated shortages to overcome and because we absolutely have to improve the quality of our stock for social welfare reasons and for ecological reasons ( new homes cost the inhabitants far less to run).

    Once we start to supply more than we need on a yearly basis, prices will tumble. People have generally only seen price rises so they are conditioned to think that things only ever go up. I am more ‘Spock like’ in my analysis and I see absolutely no reason why prices shouldn’t eventually fall by 30%.

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  • Incumbent govts hardly ever increase their share of the vote, Libby. To get an outright majority was considered a near – impossibility before it became obvious UKIP will actually get some seats this time.

    I’m heartened to hear your prognosis flashy. I think the student fees will bear down on prices beyond this construction boom.

    You always hear of 9% HPI yoy since 1952, but when you consider how much lower IRs can go, how many more people can gain mortgage access and how many more women work now, it seems we’re at the end of the road for a lot of these sources of growth just as a particularly put – upon generation enters the market. Subdued HPs until 2025, I say. But perhaps rising inequality, the unabated rise of BTL and will prove me wrong.

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  • *and FDI will prove me wrong.

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  • It was really only the 80s when house prices properly started to go crazy. This exactly coincided with the government effectively pulling out of the house building business. They left it all up to the private sector whilst doing nothing to ensure the stability required to ensure than supply continuously responded to demand. Unfortunately the private sector supply failed every time there was a downturn and sometimes even when there wasn’t.

    When the building industry finally starts to consistent to respond to demand ( estimated mid 2016 onwards) there is very little reason why the 30 years of crazy shouldn’t slowly begin to reverse. It really is that simple. OK, that’s it for me.

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  • @Libertas: interesting points about negative interest, but it’s also possible that NIRP could see banks raising rates for new borrowing, to avoid their margins being squeezed. Applying NIRP to savings would be about as popular as ebola.

    In a deflationary environment debt becomes more expensive, but are you seriously suggesting that banks would pay you to take out a mortgage under NIRP?

    The Govt might want higher house prices, but in a rapidly deflating economy their ability to stimulate this outcome becomes ever more limited. The unfolding oil price crash may well prove to be the catalyst for an even bigger credit deflation contagion than 2008, one wihich could make these latest stress-test assumptions appear rather conservative.

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  • Typing on a phone sucks and I think predictive text sucks even more. I think the increase in the nations typos will one day cause a war or something

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  • @FM @9

    From what I understand the planning application process was designed to keep the private sector in check when the govt. was building but was never reformed when the councils halted construction. It has always interested me that we weren’t building enough in 2002-2007, when prices were unprecedented in income multiple terms and growing at breakneck speeds for such a long time. I presume it’s all down to planning.

    It is a real shame the coalition didn’t take the chance to build themselves in 2010. Would’ve done wonders for the HB bill and youth unemployment.

    “Are you seriously suggesting that banks would pay you to take out a mortgage under NIRP?”

    Yes. He says it all the time. He doesn’t even say it as if it’s only a possibility. I think he thinks this is DEFINITELY going to happen and imminently. To be fair, most of his predictions aren’t couched in any uncertainty whatsoever, so perhaps it’s just a question of style.

    @FM @11

    Indeed.

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  • @12 I hadn’t thought of it like that but it sounds about right. It was a planning failure but it was also a failure to realise that the private sector was bound to stop building in a downturn. The whole point of strategic industries is that they have to function regardless of profit. It doesn’t get more strategic than housing so the state has to be involved.

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  • Problem is they never build houses where people want them. In Oxford there is building going on (2000 new homes) but in the worst part of town that you would have to pay me to live in. This along with provincial Bicester, tens of thousands of new houses but no one really wants to live there. so the quality, well located homes keep going up in value at a rapid rate.

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