Wednesday, 14 May 2008

Mortgage approvals take a dive

Yesterday, the Council of Mortgage Lenders published data on the number of new mortgages. However, the bad news from the banks was buried beneath yesterday's terrible inflation numbers.

They can run, but they can't hide. Here is a picture of the sorry tale coming from the house lending business. The number of new mortgage approvals is way down. Moreover, the number appears to have reached a dismal plateau of about 40 thousand a month. Normally, January and February are quiet months in terms of lending activity, whith things picking up in March. Not so this year. The March number is actually a fraction lower than February.

Remember the golden rule of real estate - the supply of credit determines house prices. No credit equals a housing crash.

5 comments:

powerman said...

Some questions I don't have full answers to yet. I'd like to know everybody's thoughts.

I wonder what this graph would look like if inflation forces interest rates up ? Much worse. I have a vague hunch that the BoE cannot currently perform it's role of fighting inflation with interest rates without triggering the largest house price crash (and subsequent downturn in consumer demand) seen in several generations in this county.

To what degree is the international banking system exposed to British mortgage debt (and Irish, Spanish etc.) ? I have no idea and I can't find any discussion of it in mainstream media. If the answer is 'substantially so', then that would be another reason for them to allow the inflation to continue.

Perhaps the intention is allow the inflation to contine, and spark off some wage inflation to try and renormalise the ratio of debt to income ?

Is that possible ? What would be the likely unintended consequences?

People on fixed incomes (i.e. pensioners) would get horribly burned. It would also be a nasty though effective way of lowering the country's massive pension liabilities (especially for the wave of public sector baby boomers coming to retirement who's final salary pensions seem inviolate).

Hmm..

Alice Cook said...

Powerman,

On your first point, higher long term rates are definitely on their way. I had a look at mortgage rates, they haven't followed the base rate down. Over time, I expect this trend to continue, and as you say, those mortgage approval numbers will start to look really ugly.

Thanks for the comment.

Alice

Alice Cook said...

Powerman,

On your first point, higher long term rates are definitely on their way. I had a look at mortgage rates, they haven't followed the base rate down. Over time, I expect this trend to continue, and as you say, those mortgage approval numbers will start to look really ugly.

Thanks for the comment.

Alice

Anonymous said...

Oh no! Think of all those first-time buyers who can't get on the property ladder.

Powerman - how dare you talk about public sector baby boomers and their final salary schemes. That's supposed to be a secret! The simple fact is the government can't pay the pensions. So the only way this can go is:

1) Very high taxes now - cost bourne by all non-retirees, especially private sector

2) Government borrowing now - cost bourne by kids current and future to pay for excesses of their grandparents.

3) Cut pensions by inflation - cost bourne by everybody, but proportionately most by savers and pensioners not on a public sector gravy train

4) Cut public sector pensions through repudiation - cost bourne by public sector retirees.

While I'm desperately hoping for (4) I think it's the least likely given that they vote. I think (3) isn't possible due to global wage arbitrage. (2) is possible but difficult due to rising long term interest rates and the poor debt markets. (1) is political suicide but at least its possible and the negative effect on the economy will be delayed.

A rock and a hard place. There is no solution. The government's policy was promise now and pay tomorrow. Tomorrow just came in 2008.

Nick

powerman said...

I think wage inflation is still possible despite global wage arbitrage if it's accompanied by a proportionate devaluation of the pound.