Monday, 28 April 2008

Computer says no.

The mortgage industry are pressing the delete button on the housing bubble.

Today, two major lenders – the Abbey and the Nationwide – announced a further retreat from the high risk end of the mortgage business.

The Nationwide put a cap on the size of new loans. In future, borrowers will be limited to credit of just £500,000, which will not get you too far in many parts of London and the southeast. The Nationwide have also introduced tough new rules that effectively limit new loans with an LTV of 90 percent.

The Abbey is not far behind. In future, borrowers looking for interest-only loans will need to have equity worth at least 50 percent of the home value. The Abbey also tightened up the terms on their 95 percent LTV loans.

Everywhere, lenders are pulling back and the days of easy credit have all but disappeared. With credit gone, the bubble has burst. The euphoria of house price inflation is about to be replaced by the tyranny of negative equity.

I saw this coming, really, I did. In fact, I thought that a housing crash was so obvious that I could not understand why lenders could not see it too. Now, it seems they have seen the danger, and panic has taken hold. Loan conditions are tightening, rates are rising, and no one wants to hear about those it-can’t-lose buy to let investment opportunities.

Why did the banks react so late? Why didn’t the banks stop lending when house prices began to rise at double-digit rates, while incomes remained flat? Why didn’t they adopt a more cautious attitude when household sector debt began to accelerate?

Actually, there is not much point asking these questions anymore. The damage is done. The banks and their easy credit loans have created a bloated mess.

More important questions are now emerging. Will a major high street bank follow Northern Rock into insolvency? How much will it cost to clean up bank balance sheets once the default rate starts to rise and the sector drifts towards a systemic banking crisis? How far will house prices fall, and how long will it take?

9 comments:

Josh said...

Soon, it will be impossible to get a mortgage.

Anonymous said...

top comment! continental europe to follow shortly... best from brussels, esteban

Anonymous said...

90% or _less_?

CityUnslicker said...

They were told not to see it. Gordon Brown said boom and bust was behind us and we were in a socialist paradise of ever growing GDP...then the credit crunch hit and they did no t see that either.

Where will it end, with prices down 20-30% in real terms by the end of next year, when the corner will start to turn.

Anonymous said...

Alice, a studio flat--STUDIO, mind you!--just sold below my (rented) flat in W10 for £220,000! The bubble has not yet burst under any circumstances. I believe it will take at least 2-3 years before we see meaningful discounts in the price of housing (in London, anyway).

Alice Cook said...

Anonymous,

Thanks for the comment.

I am sure that there are still people who haven't woken up to the new housing market reality and end up paying more than they should. Personally, I always felt that it would take years for the bubble to unwind. Actually, I have been surprised by how quickly it has happened.

Alice

Alice Cook said...

Cityunslicker,

a fall of just 20-30 percnet? I am beginning to think that prices might fall further than that.

Alice

Anonymous said...

Alice,

A while ago I mentioned why I think the bubble pops quicker here than the US. The main reason is that regardless of the imbecilic buyers and delusional sellers, the UK banks have already been crippled by the US bust and thus as you say the oxygen isn't there. It doesn't even matter what the buyers and sellers think if nobody is dumb enough to lend them money.

Perhaps you could do a post on the "it's different here" rationalisations for London. I still hear them.

Nick

hovis said...

"I saw this coming, really, I did. In fact, I thought that a housing crash was so obvious that I could not understand why lenders could not see it too."

I'm sorry but many saw it coming ten years ago and it didn't happen, and if you've been waiting 10 years for crash it's a mighty longtime just to say I told you so.

Yes Brown skewed things buggered up fundamentals etc. But why did banks do it - because if they didnt sombody else would, plus their bosses were looking for comparable returns to their peers.