Friday, 23 May 2008

Everything collapses but the price

The Council of Mortgage Lenders have just published their gross lending activity for April.

CML members pumped £25.3 billion into the housing market last month. However, the CML could not decide whether this was a good or bad number. On the one hand, it was a 5 percent increase from March, but on the other hand it was an 8 percent decline from April 2007.

The CML became rather excited about the timing of Easter. Apparently, they normally expect a fall in gross lending activity from March to April. This year, Easter was in March, and this seems to have affected the monthly profile this year. Neverthess, for March and April combined, lending was down 16 percent from 2007 levels.

The CML also published their housing market forecasts for the rest of 2008. UK lenders do not expect anything good:

  • House prices to be around 7 percent lower at the end of the year than at the end of 2007.
  • Property transactions in England and Wales to be around 35 percent lower than last year at 770,000.
  • Gross lending to be around 21 percent lower than last year at £285 billion.
  • Net lending to be half last year’s level at £55 billion.

    Overall, it looks a rather weird forecast; everything is falling at double digit rates except house prices.

    Decoding the forecast, the CML appear to be expecting a lot of denial from house sellers. Lending and sales will collapse, but sellers will cling to the 2007 valuations regardless. Maybe the CML might be right on that one.
  • 17 comments:

    aSteve said...

    The important question is this:

    What proportion of total mortgage lending was against existing homes, and what proportion was for new purchases?

    The former may generate revenue, but does not buoy the market for houses.

    CWS said...

    Lending has flat-lined. It has maintained the same level for months.

    VADO said...

    Asteve do you mean new lending versus remortgagees?

    aSteve said...

    The CML are the Council for Mortgage Lenders - a trade body representing those who profit from the total amount of outstanding mortgages.

    Imagine I had a house, say, currently valued at £500K, with a £200K mortgage - no savings; credit card debt and a shaky job prospect... zero cash savings. (I don't, BTW.) With a 40% LTV, I'm "prime" - so, anticipating a storm ahead, I re-mortgage to 50% LTV (not enough to raise any eyebrows) and use this to pay off my credit cards and put a lump-sum in an deposit account. This gives me a couple of years' buffer in case I loose my job... and the cash deposit interest offsets my additional borrowing costs. It's a kind-of insurance package - from a home owner's perspective.

    How often is this happening? I don't know. If the above were my position today, that's exactly what I'd be doing. I'm presuming that such actions would be included in the figures for mortgage lending. Furthermore, I think that many mortgage lenders would want to help - the last thing they need is a debtor having a "liquidity crisis" adding to their bad statistics... plus, as long as I don't make their loan-book look risky (and that doesn't take account of my personal circumstance - only if I've paid on time) I'm someone who can demand to be looked after.

    Mista B said...

    Same thing happened in the U.S. First building permits, construction, and lending top out and drop like a stone. At that point, the bubble has officially ended. It nevertheless takes not only sales but sales at lower price levels for house prices to come down. Home prices in the UK were way above trend, as you've indicated. A 10% decline would do nothing to return prices to an affordable level. A much steeper decline is more likely. I expect the next year will support this notion.

    Alice Cook said...

    Asteve, your scenario is basically mortgage equity withdrawal. The BoE as a data series that picks this kind of thing up. However, it is only released on a quarterly basis.

    Alice

    aSteve said...

    Alice, Yes, that's the badger... I'm saying that a proportion of the CML lending will be exactly that... and this might stem the number of forced sales, but it won't support prices.

    MEW or HEW or my more operational description... I'm guessing that's a sizeable proportion of today's lending.

    P.S. I'm intrigued to discover what you think about the figures I posted under "What do you make of this......?" - they build somewhat on the detail in your starting point...

    Alice Cook said...

    Asteve, I saw your comment earlier today. My big "m4" post is on its way. As you know, I am firmly in the inflation-stagflation gang.

    Although I see that M0 is slowing, M4 is still growing rapidly and it is contributing to inflation. I also think that there is a legacy of easy money that will keep inflation bubbling for at least another 18 months.

    aSteve said...

    Alice, don't expect an easy time from me, then... I'm a Deflation-Bliflation type... in the context of the UK, of course. The USA definitely seems to be trying for the inflation/stagflation route. ;)

    I'm short of a credible series of data for UK M0... so I remain uncertain about it. M0 expansion is skewed by the 2006 Reform of Sterling Markets... which (for uninteresting technical reasons) will lead to larger reserve balances... which behave like M4, but are counted in M0. I'm uncertain if this is significant.

    M4 expansion is only inflationary for certain things. It won't necessarily (or in this case) lead to wage increases, for example... nor will it lead to increased consumptive demand - since with M4 expansion comes higher interest payments and lower disposable incomes. M4 expansion can't save retail - only a reduction on retail borrowing rates can do that... and retail borrowing rates are now almost entirely detached from central bank rates.

    What is this M4 being spent on? Well, my guess is that it is being used to redeem foreign portfolio investments... where investors do not want to roll. In 2007, there were £1,081bn (yes, £1.081tn) owed... compared with £281bn in 1997... a 285% increase. These are very real debts - and need to be repaid somehow... at the end of their 2,3 or 5-year typical terms.

    Foreign portfolio investment is how M4 has expanded to its 2007 levels... but now, as investors in securitised debt withdraw entirely from the market, banks are left with no real alternative but to put the (typically 20+year mortgage) debts on their balance sheets... erm... somehow... and foreign investors will likely then exchange their Sterling funds for some currency in which they now find the most tempting investments... probably not Sterling, I'm guessing.

    I am extremely interested to establish who are the investors... and how they financed their investments. If, for example, the strategy was to borrow in Yen, Euros, or US$ - then profit from the spread (having insured against losses using a CDS) then there is a significant possibility that the increased M4 represents the existing debts of mortgagees previously hidden from M4 - being classified instead, until now, as "Foreign Portfolio Investment".

    The amount of securitised debt is sufficient to skew any sensible interpretation of M4 expansion alone.

    aSteve said...

    P.S. I'm really unclear what happens to M4 when a German billionaire, for example, decides that he doesn't want Sterling, but Euros instead. If there is a big capital flow like that between currencies... how does it affect them? I'm guessing this is why Sterling is suffering relative to most currencies - especially the Euro.

    Mark Wadsworth said...

    That's a good chart, but was 2007 a typical year? I assume that May to October usually show higher figures than November to April, in other words, if net lending stays flat for the rest of the year, in June 2008 they might be reporting a 30% fall compared to June 2007.

    simon said...

    "Overall, it looks a rather weird forecast; everything is falling at double digit rates except house prices."

    Alot of people are refusing to sell at a 'low' price and are renting out the house they 'own'.

    House prices might stagnate for many years.

    aSteve said...

    Simon: "House prices might stagnate for many years."

    Is there any precedent for this anywhere in the world?

    Anonymous said...

    Housing prices can't stagnate very long. There is a natural turnover in houses due to death, divorce, bankruptcy, retirement, redundancy and other causes. In a bad market, these forced sales go at the true market rate (possibly lower). That creates the comps for the neighbourhood. Potential sellers may decide not to sell, but the prices will still drop per the normal valuation criteria, and banks will lend accordingly.

    It's unstoppable and stubborn sellers won't stand in the way for long

    Nick

    Mberenis said...

    This blog has been indexed by a Real-Time Statistical Search Engine. (R.T.S.S.E)

    By leaving this comment posted on your blog, you will continue to receive free targeted traffic from our search engine.

    We present to you blogs, websites, link building tools, and other various local directories in a format that displays PageRank, Traffic Rank, Inbound Link Count, and Blog Reaction Counts. This allows you to monitor in real time popularity and traffic of over a potential 4,000 link building and marketing sites.

    http://www.TheRankDirectory.com

    Simon said...

    asteve

    Try Germany 1990-2005 or how about the UK 1992-1997.

    aSteve said...

    OK, I'm not as familiar with the German market as the UK market... but I'd be easily convinced that they behaved similarly over the stated time scales. The UK market, however - independent of the indices - I'm sure fell abruptly in the early 90s - and then prices grew (albeit at a somewhat slower pace) until 1997's relaxation of monetary policy.

    Housing indices - by way of time averaging and a shift in the demographic of buyers and type of houses that sold in significant volumes obscure the reality for people - both by under-stating the fall in prices on the one hand, and also by under-stating the recovery.