Tuesday, 1 April 2008

Banks go mad on real estate

(click on the chart for a sharper image)

This chart pretty much tells the whole story of industrial development under new Labour. Manufacturing has been starved of investment funds, while real estate lending has exploded.

This chart is actually worse that it first appears. To understand why, we need to clarify the data definitions more precisely. It compares UK bank lending to both manufacturing and real estate firms. The data does not measure the total amount of bank lending to real estate.

This chart is based on lending by industry. The series marked "real estate" simply measures the "amounts outstanding of UK resident banks net lending to companies undertaking the development, buying, selling and renting of real estate". Furthermore, this series does not measure net lending to construction. Likewise, the manufacturing series measures "amounts outstanding of UK resident banks' net lending to manufacturers".

Back in 1997, manufacturing firms received more bank credit that real estate firms. In contrast, lending to real estate firms today is four times higher than that of manufacturing. In fact, banks have increased net lending to real estate firms by over 460 percent in ten years. What is even more shocking is that manufacturing firms actually have less net lending than back in the summer of 1997.

The more one digs into the lending activities of UK commercial banks, the more frightening it becomes. It is as if banks literally went mad and gave a loan to any application that had housing written on it. However, a firm from the manufacturing sector was treated like the proverbial leper.

(Data source: Bank of England, as described in post, the series codes are RPQTBSF, RPQTBSY)


cws said...

Alice, you have produced some shocking posts, but this one might actually be the most depressing. What has happened to this country.

Anonymous said...

The UK is a nation of real estate agents.

yellerKat said...

WOW. That's completely insane.

Anonymous said...

What a terrible mess, I guess its a bit of a vicious circle, as large profits start to realise from real estate those employed in actually making things decide to switch and start building up their property portfolio's, Which in turn leads to more speculation etc.

Banks have such as NR have been acting in a similar way to hedge funds which is very very scary as its peoples deposits (and ultimately taxes) that they're playing with. The next few months are going to be extremely interesting as more writedowns occur.


francois-guillaume said...

brits gambled in Real Estate. Dont bail it out with your taxes... just move away from UK and gamble away in another country....
come back here in another 10years when the mess will be cleaned up !

Anonymous said...

When the crunch comes, I honestly do not know what could pull the UK out of a recssion ?
We have nothing worth exporting now - too much emphasis has been put on financial services and not enough on encouraging industry and inventiveness.
The smart guys have already left the UK or will abandon ship very soon.
What will be left I hate to imagine - a population of yobs living off hand-outs with the remaining few people in jobs living from hand to mouth and working till they drop.