Earnings fail to keep up with debt

Here is a chart that every UK consumer should think about every time they go out shopping. Since 1993, real incomes have barely increased. However, household debt, adjusted for inflation, has exploded.

For the last fifteen years, personal debt is the fuel that has powered the UK economy.

Nurses shackled by huge debt burden

A recent survey by the trade union Unison revealed the extent of personal indebtedness among student nurses. While a newly qualified nurse earns just £19,683 a year, the average student is carrying £7,000 of debt. The study shows some students have debts of more than £25,000, while the number of nursing students with debts of more than £20,000 has almost doubled in a year.

With such low earnings, and high levels of debt, it shouldn't be a surprise that the NHS finds it difficult to hire nurses in property hot spots like London.

Are you having a laugh?

The front page of today's Daily Express was hysterically funny. It seems that "home owners are breathing a sigh of relief after new figures revealed house prices are rising again in many areas. A predicted slump in the housing market has not arisen, despite the credit crunch."

The source of this unfounded optimism was the Nationwide who had published data showing that property prices nationally "were up 4.8 per cent year on year." As an aside, when 2007 property prices are adjusted for RPI inflation (which is currently at 4.3 percent), the real rate of house price growth is pretty close to zero.

Without any hint of irony the article then states that "average house prices across the country dropped 0.5 per cent in December compared with last month." So despite the reassuring headline, the data shows that the crash is well underway.

To add to the foolishness of the headline, the Nationwide data referred to November prices not December. When I looked at my calender this morning, we still had a day or two of December left. In the sloppy world of Daily Express jounalism such things are mere details.

The article then quotes housing expert Peter Bolton King from the National Association of Estate Agents, who reassured us with the following gem of wisdom; "Despite the considerable doom and gloom lately, the figures show that there is no need for pessimism."

Well, Peter, have you looked at recent mortgage approvals data? According to the the Council of Mortgage Lenders, new approvals are down 43 percent. I wonder who optimistic you will remain when house sales fall by a similar forty percent. That would put a dent in real estate commissions.

Personally, I am not a bit pessimistic about the property market. I confidently predict a great year in 2008. As a "UK housing expert" I confidently predict a 5 percent fall in prices next year, with a futher 5 percent in 2009.

Losing faith

People have lost faith with the UK property market. According to a recent survey, three quarters of people predict house price falls in 2008, with just one in five believing the average home will rise in value. More than half of people polled by This is Money said house prices would fall by 11 percent or more next year.

New year ending with declining property prices

The Nationwide released its latest survey of UK property prices. UK house prices fell by 0.5% in December, the second consecutive monthly decline

Inflation and growth - two faces of the same problem

Over the last couple of weeks two distinct views seem to have developed regarding the UK economy's near term prospects. Each view highlights a danger. the first points to inflation, the second points to recession. However, both views miss something. The most probable outcome is both inflation, and recession.

The "inflation is the problem" view highlights the recent interest rate cuts as the primary danger facing the UK. The BoE have over-reacted to problems in the banking system and pushed out too much liquidity. The UK economy was already facing increasing inflationary pressure (mainly from food and fuel). Furthermore, throughout 2007 the UK economy was growing at quite a robust pace - in six out of the last seven quarters, the UK recorded 0.8 percent real growth, which adds up to rather perky annualized growth rate of about 3.3 percent. As such, there was little sign of any recession in recent GDP data that could have justified a looser monetary policy.

The "recession is the problem" view points to the spike in interbank interest rates, the collapsing housing market and the somewhat ambiguous retail sector data. This data points to a rapidly slowing economy in the near future, which requires an equally rapid monetary policy response. Lurking in the background is the possibility of a generalized banking crisis. The fear is that a rapid decline in housing would spark an increase in housing-related loan defaults, leading to deteriorating bank balance sheets. This view has certainly taken hold in the MPC who now seem certain to keep cutting rates during the first half of 2008.

However, both views can be easily reconciled. The fear of inflation is real. From 2005 onwards, the Bank of England did too little, too late to reduce inflationary pressures. Fuel and food inflation are definitely on an upswing. The Bank of England is also right to worry about the state of the UK Banking sector. Far too many banks have balance sheets that are in poor shape, and there remains a very real danger of other banks following Northern Rock. Likewise, the housing crash is now in full swing and it will tear into consumption expenditure with a vengeance. Growth is likely to slow very quickly.

Cutting rates probably won't generate another spurt of housing inflation. The banks are now much more wary of the property market. While headline mortgage rates might not go up, the volume of lending is definitely declining. House prices will crash, regardless of what the BoE does.

However, further rate cuts will probably generate quite a bit of inflation via the exchange rate. Declining interest rate differentials will push sterling down, and this will import inflation. Judging by the enormous current account deficit (currently at 5.7 percent of GDP), the pound is severely overvalued. A nominal correction is all but inevitable. While in the long run, a slowdown in GDP would exert downward pressure on prices, in the short run this effect is likely to be somewhat muted. In the short run, the exchange rate effect will dominate.

Looking foward, the Bank of England are stuck in a hole. Cutting rates won't prevent a recession or protect property values, while raising rates would exacerbate problems in the banking sector. So inflation, recession, banking problems, and a housing crash - that is what is waiting for the UK economy as it rings in the new year.

Mortgage approvals down 43 percent.

The British Bankers Association had a nasty post-christmas surprise for the property market. New mortgage lending dropped by 43.5 per cent last month compared with last November. UK banks lent just £4.3 billion to homebuyers last month, £500 million less than October, more than £1 billion below the average over the previous six months.

There is a simple chain reaction at work here; no mortgage lending means no demand for housing. No demand means falling house prices.

Shopping our way out of a recession

At last, some good news from the shopping centres. Figures from Footfall, the market research group, showing a 25.1% increase in shopper numbers for the last weekend before Christmas compared to 2006. The UK shopper may have saved the day. All that buying might have kept the the UK from slipping into a recession, at least for a while.

It remains something of a mystery what keeps the UK shopper going. It certainly isn't income growth, which in recent years has barely kept up with inflation. The level of consumer debt now stands at 160 percent of disposible income. With that kind of debt burden, it would be reasonable to think that consumers would stop and try to repay some of it back. However, neither crushing debt levels nor stagnant income can keep the consumer away from the shops.

This week's spending spree only serves to highlight the contradictory policy stance of the Bank of England. Recent data shows that the economy grew very rapidly in 2007; the credit crunch hasn't deterred consumers from shopping, while inflation is rising sharply. However, the Bank of England seems desperate to cut interest rates.

The contradictions can only be explained by recognizing that the Bank of England has changed its mandate. It is no longer interested in price stability. Instead, it wants to maintain house price inflation.

The end of complacency

There was a widespread belief in the US that house prices never fell. For many years, there was some evidence to support that view. The aggregate US housing index had not fallen since the dark days of the great depression.

However, recent US housing data has shattered that complacent view. US house prices are falling at an unprecendented rate. The Standard & Poor's/Case-Shiller index of 10 metropolitan areas fell 6.7 percent compared to October 2006. The index fell every month during 2007.

That same complacency about house prices exists in the UK. How many times have you heard that house prices never fall? If 2007 was the year of the US housing crash; 2008 belongs to the UK.

First time buyers have disappeared

The UK housing market has become a speculative merry-go-round. There are virtually no first time buyers in the market.

What accounts for the vast majority of home sales these days? People who own property are selling their overpriced properties to other people owning property. The market is now driven by speculators trying to squeeze out capital gains from each other, with transactions being financed by banks.

The statistics on disappearance of first time buyers are shocking:

Average house prices are unaffordable for first time buyers in 466 out of 483 towns

In 2007, the average first time buyer in 8 out of 12 UK regions paid stamp duty.

The number of first time buyers is at its lowest since 1980.

An estimated 300,000 first time buyers entered the market in 2007 - 44% less than in 2002 (532,000).

First time buyers cannot afford to purchase a terraced property - traditionally the least expensive property type - in 71% of towns across the UK. Back in 2002, the typical first time buyer could not afford to purchase a terrace in only 11% of towns across the UK (51 towns).

However, the merry-go-round is about to spin off its axle. The crash is here.

Selling takes that little bit longer.....

Hometrack delivered more bad news for UK house sellers. In December, House sellers had to wait average of 8.3 weeks before an offer was received. Last May, it was just 5.8 weeks.

It is certainly slow at the moment.

The subprime crisis just keeps on rolling.

This US subprime thing just gets worse. Just when you think the US housing market has bottomed out, something else comes along to send it crashing down further.

Today, MBIA Inc, the world's largest bond insurer, announced that it had guaranteed $8.1 billion of crappy mortgage securities. This punt has imperiled its entire net worth. Understandably, equity markets were a little concerned by this news. MBIA's shares have plunged 26 percent.

MBIA inc has guaranteed a total of $30.6 billion of complex - ie incomprehensible - mortgage securities. Since there is now a possibility that MBIA might go bust, the insurance cover it offered to investment banks looks increasingly dubious. This may require banks to write down further all that subprime toxic crap on their books.

This mess just got a lot nastier.

Irish property market in freefall

The Irish housing bubble is crashing faster than anyone could have imagined.

Recent data show that prices have tanked 6 percent during the first 11 months of this year. Moreover, the crash is accelerating. During October and November, prices fell by 1.1 pecent and 1.3 percent respectively.

The average price of an Irish house in November was €292,124, compared with €310,409 a year earlier. This adds up to an average of €1,500 price decline each month throughout the past year.

It is only a matter of time before this story crosses the Irish Sea to the UK.

UK inflation up to 4.3 percent.

I really should have posted something on those shocking inflation numbers when they came out last week. In November, inflation, measured by the retail price index, rose to 4.3 per cent, up from 4.2 per cent in October. RPIX inflation, which is all the all items in retail price index except mortgage interest payments – was 3.2 per cent in November, up from 3.1 per cent in October.

The chart above highlights an important issue regarding UK inflation today. The consumer price index under-states inflation by about 2 full percentage points. Notice how the divergence is systematic. Since 2005, the RPI has been consistently above the CPI.

However, the Bank of England have the CPI as their bogus target. Yet data from the Office of National Statistics shows clearly that actual high street inflation is much higher.

Mortgage lending down 8 percent in November

Can you hear that sound? It is the sound of the UK housing market getting crunched. The market has just hit a wall.

Today, the Council of Mortgage lenders poured more cold water on the housing market. According to their latest press releave, gross lending declined to an estimated £30.7 billion in November, down 8% from £33.5 billion in October and 8% from £33.2 billion in November 2006, according to the Council of Mortgage Lenders.

As the press release starkly put it: "this is the first time that monthly lending levels have dropped below the same month in the previous year since July 2005, and clearly demonstrates the market slowdown has started. "

Darling is innocent

Poor Mr. Darling; he becomes Chancellor and the UK economy begins to fall apart. I saw him on Channel Four news last night and I couldn't help feeling sorry for him. The poor man is beginning to look like patsy. It will only be a matter of time before he will have to "take responsibility" for missing data, the credit crunch, and the upcoming recession.

Let us get the record start. Darling was not responsible for a) Northern Rock, b) the housing bubble, or c) rising inflation. For these particular disasters and errors, we must look to Brown, King, the FSA and the MPC.

No way out

“There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Ludwig von Mises

UK property funds "difficult to exit"

Today's Wall Street Journal is reporting that U.K. Property Funds are making it difficult for investors to exit. Commercial real-estate values are falling, and understandably investors in many open-ended property funds are desperate to cash out.

Unfortunately, funds managers can't come up with the cash to meet redemption requests. Funds are enforcing waiting periods because sales have slowed.

It all sounds very healthly. Anyone for another interest rate cut?

Buy-to-let investors in trouble

These days, there is a blog for any ailment, even for buy-to-let investments gone bad. Take a look at this sorry tale from America. Here we have a couple who have lost $700,000 from the property market. Now I am waiting for the UK version of this story, written up in a blog.

Talking of the US housing market, recent data is just unbelievably bad. According to the US Commerce Department, housing starts dropped by about 4 percent in November compared to October while permits for future construction slid to a 14-year low.

Happy talk

It is safe to go back in the water. The crash is over. Interest rates are coming down, and house prices are ready to take off again.

It never ceases to amaze me how much this country needs to believe in the housing market. Consider this article today from the London Evening Standard:

"House prices in London will not crash next year, according to the majority of pundits. They believe prices will freeze - although a handful of experts are more optimistic and are forecasting rises of up to six per cent. However, industry insiders agree that the number of sales is likely to be about 15 per cent lower than this year as mortgages become more difficult to arrange. London estate agent chain Kinleigh Folkard & Hayward believes the market will remain "price neutral" next year. "

Any A Level student would spot the inconsistency here. If sales are going down, then unsold inventory must be going up. Therefore, it is hard to see how prices could be going up six percent. But whatever, the need to believe is strong.

The Daily Express were also singing a happy song this morning. This time it was about the likelihood of lower interest rates:

"MILLIONS of home owners can look forward to a happy New Year with interest rates set to tumble, experts predicted last night. The Bank of England is expected to announce a quarter-point drop as early as next month. And in a further boost for borrowers, industry leaders said rates may fall to five per cent or even lower by the middle of the year. Bank bosses paved the way earlier this month by dropping the base rate from 5.75 to 5.5 per cent – the first cut since August 2005.

It is hoped another cut in interest rates will inject life into Britain’s flagging housing market. The global credit crunch, sparked by “sub-prime” borrowers in the US defaulting on their loans, has driven up the price at which banks lend money to each another. "

You have to laugh at that line beginning "it is hoped...". Personally, I "hope" nothing of the sort. I want all this housing madness to stop. I believe a further surge in house prices will do enormous damage to this country. A correction will come, and the longer it is delayed, the more painful it will be.

Suppose that the Daily Express is right and the housing market recovers due to lower interest rates. It can only happen if banks power up the credit creation machine and begin pouring out mortgages. Since incomes aren't rising, a further surge in house prices can only happen on the back of a rise in personal sector indebtedness. Britain's households are already cracking up under the weight of personal debt. It is time clean up the mess.

Where have all the 0 percent credit card transfers gone?

It is getting increasingly harder to spin credit card balances around those companies offering teaser rates. According to Fool.com 'about this time last year there were around 200 cards offering 0% balance-transfer deals. Now there are just 100.' Of those,just 24 of them offer'genuine' balance-transfer cards.

The credit crunch has just crunched the credit card market. Time to pay up folks.

Worried? You should be

London shows us the way

When it comes to housing, London leads the way. For the last eight years, it was the powerhouse behind the bubble. Now, it is leading the UK down into a catastrophic housing crash. According to Rightmove, last month the average London asking price fell by 6.8 percent. Across the UK as a whole, prices fell by 3.2 percent.

It is only going to get worse. Personally, I can't wait.

Buy-to-let - its over baby

It was on the front page of the Financial Times, which means it is official. The buy-to-let craze is over; it is dead and finish. The credit crunch killed it off.

There is simply no more financing out there for lenders. Loan criteria is tightening up, and despite the recent Bank of England cut, mortgage rates are rising.

Today, the FT reported that the number of buy-to-let products available to would-be property investors has halved since July. As for subprime buy-to-let mortgages, they have "virtually ceased to exist".

Most lenders have taken the exit. Landlord Mortgages, a buy-to-let broker, reported that "only two or three big lenders were taking on any sizeable amount of new business." Those lenders still active in the market "have introduced blanket rate rises, increased deposit requirements and cut the amounts they are willing to lend." Furthermore, many lenders have pushed up rates as a discreet way of exiting the market.

Valuations are also tanking. Liam Bailey, head of residential research at Knight Frank, reported that one in ten larger sales were being delayed because lenders had valued the property at less than the asking price. Meanwhile, many lenders are also increasing loan-to-value requirements.

Without mortgage financing, prices will crash. Forget about the Bank of England, as far as the buy-to-lend bubble is concerned, has become a marginal player. Further interest rate reductions won't help. Banks have suddenly rediscovered risk. Market forces will take it from here, thank you very much.

Feed me

The North London shopping centre - Brent Cross - has hit on an extraordinarily frank sales pitch - "feed you addiction"". Many London buses are now covered with large advertisements telling the addicted shoppers that Brent Cross is just the place to get their end-of-year fix.

However, the addicts are close to an overdose. Personal sector debt in the UK is now so large that the Banks are beginning to get frightened of the debt monster that they have created. Although the Bank of England has cut rates, banks are increasingly wary of any new lending to UK consumers.

Feed the addiction? Not this year. Please forgive the corny christmas reference, but it is time for cold turkey. UK consumers are shopped out. The enthusiasm for the housing bubble has gone. It is time to start paying all that debt back,

More good news

It is four out of four.

Yes, it is more good news from the Royal Institution of Chartered Surveyors (RICS). House prices have fallen for the fourth straight month.

The latest survey from the RICS shows that house prices fell in England, Wales and Northern. However, the news wasn't so great in Scotland. Unfortunately, prices are still rising there. Lets hope that things get better north of the border next month.

The RICS said that inquiries from new buyers were still falling heavily, while the number of newly-agreed sales was dropping at its fastest rate since 1999, when Rics first started questioning its members about local housing developments.

A bubble in property-related TV shows?

If TV coverage is any guide, the British are obsessed with property. Here is a list of just some of the TV shows pumping up interest in the housing bubble.

To tell the truth, most of these titles are totally unfamiliar. Obviously, I am just not watching enough TV. Feel free to pick out the most atrocious show. From my limited contact with these vile programs, I particularly detest House Auction. But hey, that is just my opinion. There could be more despicable programs out there.

Many thanks to Traderboy, who kindly compiled the list.

A Place By the Sea
A Place in Greece
A Place in the Sun
A Place in the Sun: Home or Away
Build a New Life in the Country
Build, Buy or Restore
Changing Rooms
Did They Pay Off The Mortgage In 2 Years?
DIY SOS
Escape to the Country
Extreme Makeover
Grand Designs
Grand Designs Abroad
Home
Home From Home
Homes Under the Hammer
Honey I Ruined the House
Hot Property
House Auction
House Busters
House Chain: Under Offer
House Doctor
House Hunters in the Sun
House Invaders
House Price Challenge
House Race
Houses Behaving Badly
How Not to Decorate
How To Be a Property Developer
How to Rescue a House
I Want That House
I Want That House Revisited
Living in the Sun
Living etc
Location Location
Making Space
Moving Day
My Place in the Sun
Nice House… Shame About the Garden
Other People's Houses
Our Home
Pay Off Your Mortgage in 2 Years
Property Dreams
Property Ladder
Put Your Money Where Your House Is
Relocation, Relocation
Restored to Glory
Room For Improvement
Selling Houses
Staying Put
Streets Ahead
Super Agents
Superhomes
Through the Keyhole
To Buy or Not to Buy
Trading Up
Uncharted Territory
Up Your Street
Would You Buy a House with a Stranger?

Say hello to the Finnish housing bubble

I find the idea of a Finnish housing bubble very disconcerting. The Finns seem far to sensible to be taken in by the property speculation and housing madness. Unfortunately, the sickness has even reached the far flung reaches of Northern Europe.

Cleck out the Finnish Housing bubble blog. It is written in English. I can only assume that if it was written in Finnish, the bubble would have remained a secret.

Location, Location, Location

Go on, admit it; you would just love to join Kirstie and Phil and have your home featured on Channel 4's property-pumping show "Location, Location, Location".

Well, the UK housing bubble blog can show you the way, just click here and register.

Here is the sales pitch from the website:

"Channel4's top-rating property programme wants to help you in your search for the perfect home. To do this we are seeking house hunters who would appreciate expert opinion and advice from professional property hunters Kirstie Allsopp and Phil Spencer on what and where to buy in your desired area. The show will focus on the process of your search. It will be a frank and factual account of all the negotiations.

We need to be sure that everyone we are talking to has genuine intentions to move house and are in a position to do so (i.e are sold/under offer and chain free). Please read all questions carefully and ensure your responses are detailed. We want to find out as much about you as possible - who you are and what you are looking for. What may seem trivial to you may be just what we are looking for.

We really can help people to find their dream home as the service that Kirstie and Phil provide is second to none. If you want to take part in this fantastic show, and are ready to place an offer on a new home, then begin your application now!"

You just have to admire the cynicism: "Channel 4's top-rating property programme wants to help you" and "We really can help people to find their dream home". Lets not forget that "the service that Kirstie and Phil provide is second to none".

Do you think Channel 4, Kirstie and Phil would want to help me with my rent. Why aren't there any shows about people looking for new rental properties? Why doesn't Channel 4 have a programme called "rent, rent, rent".

I think I know the answer. Property programs like this one, appeal to the base activities and instincts such as greed, speculation and misrepresenting the truth. In contrast, renters today understand this this housing market is a con and a fraud perpetrated on vulnerable and gullible people. Renters are too smart to be taken in by the likes of Kirstie and Phil with their fairy stories of easy money coming from housing speculation.

Peter Schiff on the crash

I have to admit to being a great admirer of Peter Schiff. His track record on forecasting US economic and financial developments is nothing short of astounding. Although, he is talking about the US, it is uncanny how much of what he says also applies to the UK.

Listen to him, it will be worth it.

The bubble is back on; the crash is cancelled

(click on the chart for a crisper image)

It took just one interest rate cut of 0.25 percent, and sellers have "regained their confidence'. Asking prices in the England and Wales increased by 1.1 percent in December.

According to home.co.uk, a majority of home sellers believe that the recent interest rate cut will be the first of several from the Bank of England, which will revitalize the bubble, and return us to those glorious days of double digit house price inflation.

To be fair, home.co.uk did warn that sellers could be seriously disappointed. Mortgage lenders have tightened up, and the number of approvals are way down. Sellers may ultimately find that their overpriced houses will just sit idly in estate agents windows.

The Bank of England must be happy. Since its primary objective is now maintaining high and stable housing inflation, today's news must be very welcome indeed. With a few more cuts, housing inflation could easily return to the desired double digit level, which the Bank achieved during most of the last decade.

What really determines house prices

As the UK house bubble took off, experts were telling us that prices were determined by "fundamentals" - planning regulations, scarce land, migrants, changing family size, divorce and a myriad of other half-baked explanations.

Take a look at these two charts, and see whether you can see any patterns. The first is real average wages (deflated by the retail price index) and the Halifax UK house price index (again, deflated by the retail price index)


I think we are are fairly safe ground if we conclude that house prices have departed significantly from earnings.

Here is a second chart, this time, we take out average wages and include real personal sector debt secured on housing. This series comprises of mortgages and home equity loans. Again, it is deflated by the retail price index. As you can see, there appears to be a close connection between the two series.

While there may be many factors that influence house prices at the margin, the availability of mortgage debt is the key driver. Without the huge growth of mortgage debt, there could be no bubble.

However, that average wage series may yet have a say in the long run level of house prices. How can all this newly acquired debt be repaid? Yes, it has to be wages. At some point, house prices must re-establish a heathly relationship with average wages.

Perhaps we are at that point right now. Take a very close look at those pink lines. The last data point is looking downward.

(All series are indices where April 1993=100; average earnings data is from the ONS; debt data is from the Bank of England; house price data is from the Halifax. Although the charts were constructed by myself; anyone who wishes to use them on their sites, just go ahead; an acknowledgement would be nice but not compulsory.)

UK Inflation - factory gate prices rising sharply.

What were the monetary policy committee thinking when they cut rates last week. Well, they weren't thinking about inflation. Today, the ONS released the latest producer price data, which tore to pieces the Bank of England's feeble claims that inflation risks were under control. The annual increase in November was 4.5 percent. Producer price inflation is now higher than at any time since August 1991.

The news on input prices was even worse. Input price annual inflation rose from 8.5 per cent in October to 10.3 per cent in November. Of course, energy plays a large role in this series, and this largely accounts for the recent surge. Nevertheless, it won't be long before firms start passing on these price increases to consumers.

Oh I forgot, there is one price that is falling fast - house prices. Don't worry, the Bank of England is always there for the housing market. It needed a little boost, and the MPC delivered with 0.25 percent cut.

However, the housing market might need a further pick up in January. Will the MPC oblige? What the housing market needs, the MPC will provide. As for inflation, the MPC will prattle on about core inflation being under control, while the rest of us will see rising prices down at the high street.

House prices will keep on rising

Here is Stuart Law, chief executive, Assetz on the future path of UK house prices:

"How can the UK housing market be over-valued and houses unaffordable when people are still paying and prices are still going up?

I expect property prices to rise by around 5% next year, due to the strong fundamentals of undersupply and falling interest rates. The Government forecasts that 4.4 million more people will be living in the UK by 2016, and house builders will not be able to supply enough property to meet that demand, defending robust house prices and even driving them up further.

House prices drop when interest rates go through the roof, but that scenario doesn't look very likely at all. Inflation is always a risk, but oil prices don't have the same impact they used to and over the long term inflation is very much under control.

The other factor said to cause prices to fall is the prospect of a recession, but all the economic fundamental indicators are positive. There is nothing visible that is going to cause a serious recession in the UK or globally. Even if the US went into something of a recession, the global nature of the market means the UK isn't as tied to the US as it used to be.

Finally, the buy-to-let market is helping to hold up the housing market and rents are rising more than they have in years. Yes, repossessions are increasing, but those properties are being bought by investors. While these sales are at lower prices, people who don't need to sell are not discounting."

Well that has me convinced. Obviously, it is time to stop renting and starting buying. Where is the nearest estate agent?

UK overloaded with household debt

UK households are drowning in debt.

The numbers are extraordinary. Take a look at the following three charts that compares the level of personal debt to UK annual output (GDP).



Since 1999, personal sector debt increased from around 65 percent of GDP to just over 100 percent of GDP. In the last four years alone, personal sector debt rose by an astounding 10 percentage points of GDP.


Loans secured on housing have driven up personal sector debt. Over the last ten years, secured debt - which includes mortgages and home equity loans - increased by over 30 percentage points of GDP.


Unsecured debt (basically credit cards and unsecured bank loans) now stands at around 16 percent of GDP. By historical standards, this is a very high number. However, the ratio has fallen slightly since Christmas 2005. Proving that they are not completely stupid, banks have become increasingly worried about the capacity of people to repay unsecured debt. In response, they have quietly tightened lending standards. Nevertheless, this modest reduction has been overwhelmed by phenomenal growth of housing-related credit.

The Banks are trapped

Why did the banks allow housing debt to reach such dangerous levels? Unfortunately,banks took far too much comfort in their loan to value ratios, and relied too heavily on house values as collateral.

Rising house prices and easy credit enticed the banks into over-extending themselves. As house prices went up, loan to house price ratios (LTV ratios) allowed banks to hand out ever larger mortgages. As mortgage loans increased in size, house prices went up even further. Bigger loans meant higher house prices. This generated a cycle of increasing house prices, with in turn permitted ever larger mortgage loans, and so it went on for for eight or so years.

Banks also took some comfort from the fact that their mortgage loans were collateralized on an asset that was strongly appreciating in value. In the unlikely event that someone defaulted, the bank could encourage the mortgage holder to sell up and repay. With rising house values, people who found themselves in repayments difficulties, could often sell at a profit, and walk away without incurring any financial losses. This kept default rates at historically low levels, and persuaded the banks that mortgage lending was a comparatively riskless activity.

However, this spinning wheel was poisoning UK households with credit. The housing bubble could only continue with ever-growing debt levels. After 8 years of a relentless credit-financed housing bubble, the banks have pushed households to the very limits in terms of debt servicing costs.

Now, the wheel has suddenly stopped and moved into reverse. House prices are now falling and as they do, the LTV formula works in reverse. Banks will have to reduce the size of their mortgages to maintain their loan to house price ratios. This means less credit, which will reduce housing demand. LTV ratios are about to cut away the foundation of the UK housing bubble. The banks are now overexposed to a market that is in deep trouble.

Of course, the banks are not the only culprits. Regulatory oversight was virtually non-existent. The Financial Services Agency paid little attention to the increasingly risky behaviour of mortgage lenders. The Bank of England played its part in this sorry state of affairs. It provided the low interest rates that fired up the lending boom. However, the banks will have to carry the can. After all, that huge stock of personal debt is on their balance sheets.

Sentiment is shifting

In some respects, the US subprime crisis helped obscure this deeper balance sheet problems within the UK banking sector. With the value of housing collateral beginning to fall, and defaults likely to rise, bank balance sheets will come under serious stress. As such, the UK has its very own home grown credit crunch that has very little to do with rising default rates in the US.

UK Banks now face a serious funding crisis. Around a quarter of mortgage funding came from borrowing from other financial institutions via the wholesale money market. Now, these institutions are looking at the UK housing market with enormous skepticism. Any further lending to the likes of Northern Rock, Paragon, and the Alliance and Leicester looks extremely risky. Since the summer, institutional financing has dried up, and as a consequence, mortgage availability is tightening very quickly. Remember the golden rule of housing; no, it is not "location, location, location", it is "easy credit equals rising property values".

What happens next

In terms of personal sector debt, the bucket is now full. UK households can not absorb any more debt. Markets are responding to this new reality. The more prudent banks are scrambling for cash in order to defend their balance sheets against rising defaults. Vulnerable banks are selling off valuable assets to raise cash. Other banks haven't fully understood the new reality and for a while, they may be dazzled by the Bank of England's recent interest rate reduction. For a while longer, some banks might continue lending.

Without credit, there can be no bubbles. Once the flow of cheap mortgages stop, house prices will dive. At first, the declines will be slow. Those tedious conversations about rising property prices will stop. Home sales will fall off first. Housing inventory will begin to rise and the estate agents will begin to close. The crash will be slow but it will be relentless.

The real danger comes from buy-to-let speculators. If they start to off-load their money-losing investments, house prices could seriously fall, and then the banks could be staring into the abyss.

(Data sources: Household debt from the Bank of England - amounts outstanding of net lending to individuals - LPQVTXC; amounts outstanding of secured net lending to individuals- LPQVTXK; amounts outstanding of unsecured net lending to individuals - LPQVZRI; Gross domestic product from the ONS - YBHA. All data series are seasonally adjusted. Estimates for 2007 based on data for the first three quarters)

So why is there a credit crunch?

......far too many subprime loans are in default......

Shameless

Some people have no shame. After years of reckless lending activity, mortgage lenders would now like to portray themselves as helpless victims of the credit crunch, needing government assistance.

In an article in the FT, Michael Coogan, Director General of the Council of Mortgage Lenders, believes that the ailing mortgage market needs the "the help of government and the Bank of England".

The "twin earthquakes" of UK mortgage market - the closure of the capital markets and the first run on a British bank in 140 years - has left UK lenders struggling to finance their activities. Next year, lenders need to find about £90 billion, about £60 billion will be financed from savings, leaving a £20 billion to £30 billion shortfall needing to be financed by the wholesale markets.

"If the capital markets fail to reopen next year, it could lead to less innovative products – because lenders will be keeping the risks on their own balance sheets – tighter lending criteria and more expensive home loans."

But that sounds great to me - tighter lending criteria will protect people from taking out loans that they can't pay back, preventing years of misery and distress. More expensive home loans will also discourage speculative investors, who have distorted the housing market in recent years.

As for the current problems facing the mortgage industry - it is not the fault of lenders. "I don’t apologise for this industry giving finance for every type of housing." However Coogan liked this week's interest rate cut. Can we have some more of that please; easy money is the answer to all problems.

So there you have it; Coogan accepts no responsibility for the housing crisis or the credit crunch but he demands easy money and more government help.

Shameless.

Get out of debt

Get out of debt now - don't buy stuff if you don't have the money.

The Bank of England cuts interest rates - part 2

Whatever counterinflationary credibility the Bank of England might have had, it lost it today. Their decision to cut interest rates while inflation is above the 2 percent target was utterly irresponsible. The retail price index, the most valid measure of inflation, is currently at 4.2 percent. This is an unacceptably high.

Furthermore, there is plenty of evidence that inflationary pressures are rising; food prices are increasing; world commodity prices are at all-time highs, while gas prices are scheduled to go up by 15 percent in January. Rather than cutting interest rates, the Bank of England should have increased them.

So why did the Bank of England feel it necessary to throw caution to the wind and cut rates today? Their own press statement hints at two explanations; bailing out housing speculators, and protecting the Banks.

After years of double-digit price growth, the housing market suddenly felt the cold winds of reality. Prices are now falling and the Bank of England fear that the collapsing housing market might take consumption and ultimately growth down with it.

However, the Bank of England were quite happily to facilitate the housing bubble with low interest rates throughout most of this decade. When confronted, Bank of England staff would say "it is not the responsibility of the central bank to target asset prices." When mortgage equity withdrawal accelerated and drove consumption upwards, the Bank of England were willing conspirators. The consequence of this neglect was ten years of economic growth built upon rising household debt.

It was the commercial banks that betrayed this unsustainable formula that kept the UK economy growing. In the last six months the banks have begun to understand the magnitude of the debt problem in the UK. They have become increasingly reluctant to bankroll economic growth.

Understandably, the smarter banks have begun to tighten up on lending restrictions. They have also started to look at each other with more suspicious eyes. Everyone knows that UK banks are loaded with bad debts. As Northern Rock so vividly illustrated, widespread bank failure is a distinct possibility. That is why interbank interest rates have gone on a walkabout in recent months.

The Bank of England feels that an interest-rate cut will resolve all problems. Lower interest rates will encourage commercial banks to start lending to each other, and once that happens, the sector as a whole can start lending to households. Once the credit begins flowing again, house prices will begin to grow again, people will head back to the shops, and save the UK economy from recession.

What would happen if this this interest rate reduction manages to avoid a recession in the first quarter of next year? Let us suppose for a moment that house prices begin to grow again and people reengage with their credit cards and clean out the shops over Christmas. Personal indebtedness will rise, and with it, the prospect of even greater banking sector problems further down the road. The much-needed correction will be delayed, but not avoided. It will come, and the longer it takes to arrive, the more painful and protracted it will be.

Some people in the financial sector have already figured this out. The banks may try to jump off this train wreck. Credit availability may not improve despite the interest-rate cut. The economy may well slow despite the Bank of England's attempts to revive consumption. It may be tempted into cutting interest rates further. If it does, it will weaken sterling. Import prices will rise, and instead of higher consumption, the Bank of England will get raging inflation.

Bank of England cuts rates - Part 1

So the Bank of England chose the housing market over price stability and cut interest rates. It chose to defend the interests of City of London and contemptiously ignore the welfare of those who depend on fixed incomes like pensioners, the unemployed and savers. It chose a bailout over price stability.

I had a look at the Bank of England's website today, and this is what I found:

"A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money – the interest rate. In May 1997 the Government gave the Bank independence to set monetary policy by deciding the level of interest rates to meet the Government's inflation target – currently 2%.

Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth."

However, today the Bank of England released the following statement:

Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term. "

Can anyone spot the contradictions here? The Bank of England's mandate is to ensure low inflation as a precondition for sustainable growth. Yet today, inflation is above the government mandated target, inflationary pressures are rising, but to ensure growth and protect the financial sector, the MPC feels it necessary to cut rates.

The MPC is just incoherent. There is no other word for it. It says one thing and then does something else.

525 reasons to be positive

Why do people have such faith in interest rate reductions? Take a look at this clown on this US video clip. He claims he has "525 reasons to be positive" - with each reason being a basis point that the US central bank could reduce interest rates.

It seems that easy money is the answer to many problems. People can't pay mortgages; cut rates. House prices falling; cut interest rates. Share prices tanking; cut interest rates. Unemployment increasing; cut interest rates. The external deficit is on the way up; cut interest rates.

Interest rates reductions encourage people to borrow more and save less, and given debt levels that is the last thing we need. Higher demand will push prices up. With rising inflation, long term interest rates begin to rise, and people demand higher rates to compensate for higher prices.

In the long run, easy money delivers exactly what it was supposed to prevent - a recession. The only difference between a recession now and one later is inflation.

Giving credit where it is due, I found this clip on housing panic.

Northern Rock staff get bonuses

This Christmas, Northern Rock staff will receive a pay rise and hefty Christmas bonus. Staff will receive a £200 bonus plus a one-off payment of 2 percent of their salary. The generousity doesn't stop there - staff will also receive a 4 percent annual pay rise. Given that the bank is floating on £30 billion of public money, the decision has provoked a lot of angry comment .

I can't produce too much outrage about this story. The pay rise and bonus is restricted to clerical staff, who can hardly be blamed for the Northern Rock failure. The staff only helped an unsuspecting public with mortgage applications. Now that the ship is sinking, it is every man and woman for themselves. Therefore, it is hardly surprising that staff tried to squeeze out every last penny they can from a dying company.

So merry Christmas Northern Rock staff; make the most of your bonus and yourl pay rise because it is almost certainly the last with this particular company. Hopefully, you will find better and more secure jobs in the New Year.

Prices fall for the third month in a row

The Halifax has just published the latest house price data, and it makes grim reading for property owners. In November, house prices fell by 1.1 percent. This is the first time in 12 years that house prices have fallen for three consecutive months.

Howard Archer, chief economist of Global Insight provided a telling comment "The Halifax data provides significant late support to the case for the Bank of England to cut interest rates".

Since when did the Bank of England become responsible for sustaining house prices? What has happened to the government-mandated objective to maintain price stability?

UK property investors finance Bulgarian spendfest

Bulgarians are having a great time at the expense of UK "property investors".

According to the latest Transition report from the European Bank for Reconstruction and Development (EBRD), a third of the Bulgarian current account deficit - the difference between Bulgaria's exports and imports - has been financed from the sale of property.

In other words, the Bulgarians have been selling their dilapidated communist-built shacks for overinflated prices and using the proceeds to buy imports.

The EBRD is worried whether ongoing sales of Bulgarian property can continue indefinitely. The answer to this question largely depends on the supply of naive and greedy UK property investors.

House rich, cash poor

I saw the following forecast today:

"The over-60s will own two-thirds of Britain's housing wealth - worth an astonishing £2,200billion - within two decades, a study shows. "

I have a standard reaction to any doom-laden newspaper article projecting anything beyond 12 months. It is to laugh quietly to myself and move onto the next story.

However, this particular forecast raised all kinds of interesting issues. Could we really see such a disparity of housing wealth? If OAPs owned all the houses, where would the rest of us live? Is the UK destined to divide into two groups: the wealthy geriatrics and the quasi-homeless young?

There is an obvious flaw with this prediction. Today, an uncomfortably large number of home-owners don't have private pensions. Moreover, they have little in the way of non-housing assets.

In other words, the vast majority of 40-somethings are house rich but cash poor. Let me be even more blunt, if it wasn't for their overvalued houses, these people would be plain-vanilla poor.

This is the flipside of all that personal debt that has accumulated like a bad smell in recent years. Middle-aged people are running up debts today and therefore, they are consuming their future income. That is what a debt does. You consume today, but you are poorer next year. The only thing that prevents these people from being totally bankrupt is the value of their houses.

Since the great majority of today's middle-aged homeowners have stopped savings, how will they provide for their old age? There is one thing that all 40-somethings are counting on - the state pension. However, who is going to pay for the state pension? Of course, the young. The same people who can't find anywhere to live because the OAPs own two-thirds of the housing.

Hands up anyone who thinks that 2027, UK workers, who can not buy reasonably priced homes, are going to pay large taxes so that home-owning OAPs can receive generous pensions? It is just not going to happen. The young will have a strong vested interest to pressure political parties into reducing taxation and limiting pension levels.

In the absense of a decent pension OAPs in 2027 will have to sell their houses en masse and prices will start to come down. Who will buy these houses? The young.

So I am going to make my own 2027 prediction.

"The under-40s will own two-thirds of Britain's housing wealth - worth an a bubble-crushing £1,100billion - within two decades, a housing blogger shows."

I know which projection I prefer. I also think it is the most plausible.

Pleading and Begging

The demands for an interest rate cut are growing. Financial markets are "seizing up" again, credit lines are closing down, and asset prices, particularly housing, are beginning to slide. Banks, newspapers, homeowners, and speculators are now looking to the Bank of England for a helping hand. "If only interest rates could come down 0.25 percent", so the pleading goes "everything would be resolved". Banks would begin lending to each other, house prices would stop falling, and a recession would be avoided.

If only it were that easy. Sit back and ask the following question - how did we get into this mess? It all started about five years ago when the Bank of England started to print more money than it should have. This easy money found its way into the housing market, and prompted an unsustainable rise in property prices.

The Bank of England were not alone. Other central banks, most notably the Federal Reserve in America, were at the same game. In Spain, Ireland, Eastern Europe, and Australia, house prices were rising at an unsustainable rate due to an unprecedented relaxation of lending standard and an environment of historically low interest rates. In the frenzy that followed, banks extended loans to people who had no real prospect of repaying.

The bubble wasn't just contained within the property market. Easy credit and low interest rates encouraged people to consume more and save less. Rising consumption may have kept the economy growing, but at the expense of ever rising levels of personal debt.

Of course, this could not go on forever. At some point, the banks began to realise that a large proportion of their customers did not have the income to sustain the growing levels of personal indebtedness. Everyone knows that there are piles of worthless credit agreements sitting on the balance sheets of the banking sector. Now, banks are scrambling for cash, to ensure that they don't follow the sorry path that Northern Rock took the summer. At least for the present, cash is king and no sensible bank will risk lending to bail out any other cash-strapped competitor.

Here in lies the problem. An interest-rate cut won't help much if many the customers are ready effectively bankrupt and cannot repay you. At the margin, it might prevent one or two of your more sensible clients from defaulting. However, the relief will be limited and temporary. Furthermore, there is a selection problem that interest-rate cut won't help resolve. Any bank looking for short-term loan runs the risk of admitting that it has serious funding problems. Any bank asking for credit right now is almost certainly a bank that other banks should avoid.

What would happen if the Bank of England succumbed to all this pressure and cut rates? Households would probably go on another credit card driven spend fest over Christmas. Perhaps house prices might stabilise for a few months. Higher demand for consumer goods would probably keep inflation boiling over. However, by February or March, all the underlying problems would remain. Inflation would be red hot and rising, personal sector indebtedness would be higher, and house prices would still need to come down. Perhaps more importantly, banking sector balance sheets would still be in poor shape.

Here, the United States provides a telling example. During the summer, the credit crunch reduced interbank lending. Short-term interest rates increased suddenly, and many banks and financial institutions were scrambling for cash.

In a moment of panic and desperation, the Federal reserve cut interest rates by 0.5 percent. For a time, the liquidity crisis subsided. However, nothing fundamentally changed. The banks were still carrying large amounts of bad debts. After the euphoria of the interest-rate cut, doubts began to creep back in. The credit crunch returned. Short-term interest rates again are rising, and the Federal reserve are threatening a further interest rate cut.

The lesson from the US is clear. Lower interest rates can only provide an illusion that the credit crunch has been resolved. However, all those bad debts and unpaid loans are still there. There is no easy way out of this mess. It would be better to face up to the problems we now face.

Higher interest rates will discourage consumption, people will again have an incentive to save, and house prices will return to more reasonable levels. Lower consumption will probably result in a slowdown in growth. The banks need some time to work off all those bad loans. It will be a difficult time. However, if the Bank of England recklessly cuts rates, it will only delay the moment of truth. All our problems will will grow, and we won't avoid the need for adjustment.

The media campaign to cut interest rates

This Sunday, one could be forgiven for thinking that there is a concerted media campaign underway to push the Bank of England into reducing interest rates. We will pick through a couple of these articles and point out some of the erroneous thinking has infested the media recently.

A cut in interest rates is the last thing the UK needs right now. Inflation is way too high; households need to reduce consumption and start savings in order to work off all that recently accumulated personal debt; while house prices need to come down in order to burst a highly damaging speculative bubble.

However, Britain's newspapers have a different view......

Exhibt 1 - Daily Express - 100 DAYS TO HALT HOUSING CRASH

The Express offered the most hysterical headline, claiming that "Britain has just 100 days to avoid a catastrophic fall in house prices, with effects that will last for years."

Unfortunately, the Express has this the wrong way round. Rising house prices has been a catastrophe. A generation of young first time buyers have been prevented from owning homes; it has ensnared an army of amateur property speculators into making foolish investments, and created the highest level of household indebtedness this country has ever seen.

All these developments lead inevitably towards an an unavoidable and necessary house price correction. And yes, it would be great if that correction could start in the next "100 days".

Exhibit 2 - The Times - Rate cut urged to end the gloom

The Times tells us that "Pressure is growing on the Bank of England to cut interest rates this week as gloom over the economy intensifies. " The "urge" is coming from "Two of Britain’s best-known economists" - Patrick Minford and Tim Congdon, who insist that the Bank of England's monetary policy committee should "slash rates to get the banking system working and head off a sharp downturn." Further into the article we read "The pressure for a rate cut comes as UK retailers face a crucial test of the strength of consumer demand in the run-up to Christmas. "

The Times demand for lower rates is motivated by two concerns: the need to save the banking system, and keep people spending (in order to prevent a sharp downturn).

Again, this is self-serving vested interests being passed off as serious analysis. The Times wants a cut in order to bail out banks who made poor lending decisions and now want to pass the consequences of these decisions onto the rest of us. The Times also wants to keep households spending, despite the fact that many households are at the margins of bankruptcy.

Exhibit 3 - The Times (again) - Get set for the big mortgage freeze

The Times also stepped up to defend in the interests of recent home buyers; "Hundreds of thousands of borrowers coming to the end of cheap two-year mortgages are being warned they could be frozen out of top new deals as the credit crisis worsens." The implication here is clear - if only the Bank of England could cut rates, these borrowers could refinance their mortgages and enjoy further low interest mortgages. Well, what about the millions of savers who would see the returns on their investments fall on account of an interest rate cut?

Exhibit 4 - The Guardian - One in three mortgage holders 'will suffer financially'

The suffering brought on by a 5.75 percent interest rates - where will it end? The Guardian claims that one in three mortgage holders will be hit; "5.5 million of the UK's 16.5 million borrowers could struggle to get a new loan, or face higher repayments when their current deal came to an end and they tried to remortgage."

Let me counter this argument with another statistic; 60 million UK citizens will find it a struggle to deal with higher inflation, and face lower living standards as the current period of rising prices is extended further due to irresponsible interest rate cuts designed to protect banks and wealthy homeowners.

Exhibit 5 - The Independent - 27.9%: is this the shape of cards to come?

The Independent offers a more imaginative variation on the theme that "we need lower interest rates". It tries to spook us with the spectre of higher interest rates on credit cards. "A clear sign has emerged that card borrowers – and particularly those who do not have a top-notch credit record – face having to pay higher rates of interest. Last week, the Halifax launched its Classic Visa product charging a whopping 27.9 per cent."

I congratulate the Halifax for introducing a credit card offering a punitive interest rate. This is a responsible banking, telling its customers that they will be nailed if they run up a credit balance on their plastic. A 28 percent interest rate says "pay that monthly balance off in full or else". So, well done Halifax, I like the cut of your jib.

Higher interest rates on credit cards are a cause for celebration. It will discourage excessive consumption, and encourage much-needed personal savings. UK households need to work off all that debt, and higher interest rates help get incentives working in the right direction.

What will the Bank of England do?

The Bank of England's MPC will cut rates. The Bank may have gained their so-called "independence" from the government, but it remains enslaved to the City of London. Right now, banks need lower interest rates, and if that is what they want, the MPC will deliver. As for the rest of us, we will get more inflation, leading inevitably to stagflation. In the long run, the price of these upcoming rate cuts will be very high indeed.

Doom, gloom, doom, gloom more doom and gloom, yes we still talking UK property

Today, we will start off with a happy story predicting that house prices will continue their endless push into the stratosphere. Is there really no end to house price appreciation; not according to an outfit called smart new homes.

Thereafter, we return to the gloom. We will be handing out our standard fare of crashing property prices, the credit crunch, and implausible ideas about bailing out distressed homeowers.

Property prices going up in 2008

Yes, you read it right. Forget everything else you heard this week about the bottom falling out of the market. UK property prices will be going up next year, at least according to smartnewhomes.com.

That little link was my forlorn attempt at spreading a little happiness around today. However,in these days of property market depression I should not be the only one out there looking for cheery stories about ever rising house prices. If you see something similar, please email it to me here. I will promise to post the link.

Until the new year, prices will be falling

"oh there goes gravity, back to reality". Market Oracle begs to take a different view to smart new homes. It has very nice piece that starts out with face-slapping 0.8 percent price decline:

"The Nationwide, one of Britain's biggest mortgage Lenders announced a sharp 0.8% Drop in House Prices for November, the biggest fall for 12 years, bringing the annualised rate down sharply to 6.9%. Whilst at the same time the Bank of England reported a slump in new home buyer mortgage approvals to a 3 year low. The fall house prices is inline with the Market Oracle forecast for a 15% drop in UK House prices as of 22nd August 07. "

Say goodbye to subprime

Financial innovation clunks into reverse. Mortgage lenders are now pulling all those high risk lending products that kept house prices rising. "Latest data from money search engine Moneyfacts.co.uk reveals two thirds of sub prime products have vanished in the last six months. Indeed, the credit crunch has virtually destroyed the sub prime buy to let market and made a significant dent in the residential market too."

Credit quality continues to deteriorate

Stories like this one never get the attention they deserve. According Standard & Poor's $36.2 billion of US debt was in "a distressed state" - more than four times the $8.6 billion reported a month earlier. Furthermore, "distressed debt as a percentage of total debt recorded its largest monthly increase in five years, more than doubling to 4.9 percent from 2.3 percent. The ratio was as low as 2.1 percent 12months ago."

What exactly Standard & Poor's mean when it talks of "distressed" debt? It is a euphemism for debtors not paying back creditors.

Bush turns socialist

The home of the free market is taking a decidedly interventionist approach to the rising number of home repossessions. The Bush administration is brokering a deal major US lenders that will see a temporary freeze on subprime interest rate adjustments. Given that Bush has a hand in it, it almost goes without saying that the plan is ill-considered and poorly conceived. Mish does a great job pointing out the perverse incentives that this plan will offer housing speculators. Mish points out one fairly obvious flaw with the plan:

"So now the lenders all get together and decide who can afford to pay what. I have a counter proposal. Why don't grocery stores all get together and decide how much customers can afford to pay for a loaf of bread?

Seriously, that is what is being discussed here. But let's get one thing straight right up front. This has nothing whatsoever to do with "saving people's homes". This is about saving financial institutions from collapse. And the plan will fail. It rewards those who cannot afford to pay. The details are not in yet but I suspect one measure of the ability to pay will be whether or not one is current on their loans."

Keith over at housing panic rages against the plan. He has a post entitled: "Moral hazard goes off the charts as banks and our goverment talk about voiding contracts and letting teaser rates continue. That probably just about sums the whole thing up.

Do you think Brown, King, Lomax et al will cook up something similar here when prices also crash 15 percent?

UK personal sector debt

I found this great link on the immobilienblasen blog. It is site called credit action. The numbers on UK personal debt are just shocking. My favourite statistic is that Britain's personal debt is increasing by £1 million every 4 minutes.