Wednesday 14 March 2007

Time called on the US Credit binge; UK to follow in 2007?

The FTSE fell again today, and is now down to 6000.7 and may well go below 6000 tomorrow which is a 10% drop in a couple of weeks.

What has caused this?

Well in the US, there is a fairly rapid bursting of a residential housing asset bubble. New builds are being cancelled and prices of property are down on average 10%. This has caused many of the lenders of sub-prime mortgages (i.e. high risk lending) to get into serious difficulty as people begin to default on their loans. They have done this as interest rates have gone up from 1% to 5% in the past few years. This is the real legacy of Alan Greenspan whose lustre may well fade now the chickens are coming home to roost.

This is a real problem because for the last few years US citizens have been financing credit card bills by withdrawing profits from the equity in their houses. So any large problems with the housing market will reduce consumer spending and bring on a mild recession at the very least.

As we all know, what happens in the US is often followed in the UK. Although we have not gone to the same excesses as in the US, we have some of the same symptoms. Rapidly rising house prices (although we have supply issues unlike the US, giving our prices better underlying reason to rise), huge credit card lending (over £1 trillion now) and rising interest rates. We have a high money supply though which means inflation is more of an issue here than in the US. Perhaps we will be saved the worst by the huge wave of immigration that is keeping wages low and house prices high?

We are likely here in the UK to have a housing dip and credit squeeze. This will slow down the economy more quickly than the treasury is predicting and cause finance issues for our high spending government. On the plus side, perhaps interest rates will not need to go beyond 6%.

We live in interesting economic times though; shame , I preferred the mill pond.


Anonymous said...

I hope you're not, but I think you are underestimating the problems that could be faced by even a mild fall back in house prices and interest rate rises. The US, while in a shakier position that us, does not have the proportion of people reliant on welfare that we do and this I believe masks many of the real and coming problems.

I hope I'm wrong, though it doesn't really affect me except for in the family, but I'm being pessimistic instead of optimistic.

Newmania said...

Eeek CU under which box might I most coveniently hide

Guthrum said...

Credit is out of control no doubt about that, however we are building less houses than we were in the sixties per annum, causing an artificial scarcity and massive price hikes that allow 'equity' withdrawals. The conundrum is how to slowly take the heat out of the housing market, by building more homes, which will cause prices to level out and become affordable. This require adept political judgement, sadly I think we shall go straight for a 'price correcting' crash due to lack of political will. I have liquidated assets here, as this housing bubble is as unsustainable now as it was in 1990.

Newmania said...

That is a worry isn`t it but i do not thinkthat houses are terribly over valued really , people can afford them ...? There are lots of buyers

James Higham said...

Tehre's a ginormous crash coming and it's engineered by the Fed. This is not theory. Anyone can access the archives of the Fed's meeting reports [I've viewed October's] and they speak of sustaining rates until, holding levels until and so on. The year given is 2011.

CityUnslicker said...

Shot - yes the welfare point is a good one. Althought these peopl can at least default on loans (rapidly rising in the last two years) if they don't own any property.

Guthrum - very sound points, but normally what kills the market is the lack of first time buyers, i think this will still happen at some point; getting closer every day as prices increase.

N - there are lots of buyers, but this is due to low stock and supply (and immigration). I think the situation in the south east is more realistic due to these pressures. In the rest of the country there is less of an economic case for the trebling in 10 years of prices.

JH - 2011, i think they may havbe miscalculated...

Anonymous said...

Guthrum said...

Credit is out of control no doubt about that, however we are building less houses than we were in the sixties per annum, causing an artificial scarcity and massive price hikes that allow 'equity' withdrawals.

I'm not so sure the main factor is buy to let landlords snatching up all the decent first time buyer dwellings...and this can only, imo, get worse as they try and grab more as the price begins a slide, which I think is inevitable.

Althought these peopl can at least default on loans (rapidly rising in the last two years) if they don't own any property.

Not with tax credits as they are, and this is the problem. Borrowing is loosely based on the equity available now and not on income as such, and I have seen a bank asking for proof of tax credits as at least a part of the vehicle which forms the means of financing a loan long term. With 70% home ownership this is getting to be a bigger probblem and the government throwing welfare monay at people makes things worse. You can be earning just under £60k a year and still be entitled to certain child tax credits.

Anonymous said...

UK property prices far more vulnerable than people think (esp. as we are so Londoncentric in terms of Govt, media etc). There is a widespread market collapse outside of M25 of precisely what the Govt has encouraged us to build for last 5 years ie high density housing/apartments. There are already no first time buyers because of values versus income (topped up by benefits so you can get the booze in) plus HM Treasury aka FSA has put the squeeze on Lenders plus HM Treasury aka the independent BOE committee is raising interest rates as well.

By the way the "demand outsrips supply " argument is broadly based on the hugely flawed Barker Review (wasn't that HMT as well or was it one of Prescott's?) relies heavily on immigration at 150K incomers pa (sustainable?) and far fewer of you buggers out there abandoning the UK than currently!

Outside of M25 if you believe the supply/demand theory try putting something on the market in, say, Nottingham and watch the queue form.

You'll be there a long time waiting, meanwhile as reported recently 1 out of 7 of your mates and ex-colleagues worth more than £100K (not exactly Roman A) will have left the UK in the next 10 years.

Last one out switch off the light! Don't need to as lightbulbs abolished by the EU...

Anonymous said...

A guy in the next street has had his house on the market for £349K for over 3 months now, and this is a desirable area in Northumberland in catchment for good schools.

He's not getting any takers. Foxtons might have been inundated after bonus day down there for luxury flats in Chelsea, but up here's a different story. It's the same houses in the estate agents window every time you walk past - all ridiculously overpriced considering average earnings.

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