Friday, 16 May 2008

Running for cover

Credit availability is crumbling. Not only are banks pushing up interest rates on high loan to value products, they are also removing the number of loan products available to customers.

The most recent Bank of England inflation report pointed out that since the credit crunch began, the number of credit impaired mortgage products has fallen by 75 percent. The number of self-certification mortgage products has also taken a dive, falling by two thirds between February and April this year. The infamous 100 percent LTV loan products have disappeared completely.

Declining credit availability will have a devastating effect on the housing market. Last year, around 30 percent of new lending was to individuals with LTV ratios greater than 90 percent. Another 20 percent of lending went to customers with LTV ratios of between 80-90 percent. These high-risk borrowers are now finding it almost impossible to find banks willing to lend.

Easy credit drove this market into an unsustainable bubble; declining credit availability will destroy it.


VADO said...

It is interesting to note that mortgage approvals are down about 40%, while at the same time, this data suggests that the loan was greater than 70% LTV are disappearing fast. Put the two together, and the story is very obvious. Banks are looking for collateral and huge amounts of equity before they consider any new mortgage.

aSteve said...

Hmmm - number of mortgage products might be misleading. What we really want to know is how much business is written in each band.

It wouldn't matter that there are thousands of different sports cars on the market - if almost every car sold happens to be a Model-T Ford.

The media has this obsession with "number of mortgage products on offer" - which is odd. Only the ones in the best-buy league tables of the Sunday papers ever really influenced the market in a big way.

alice cook said...

Agreed. However, we know a) the number of high LTV products are falling, b) the price of the remaining ones are rising (higher rates), c) mortgage approvals are falling dramatically, d) house prices are coming down quickly, and e) MBS volumes have fallen off a cliff. Putting it all together, I think we can see what is going on.

aSteve said...

I agree, this gives a clear indication as to the direction of the market.

I would like to go further and consider the rate and extent to which the market is moving or has moved. I recognise that this is a selfish direction to move the conversation, but I think it is relevant.

For someone in my position, where objectivity over-rules the blind-chance and wishful thinking of necessity... I don't need to know what is happening now, I need to know what will be happening in 3 to 6 months time. I'd like to know what is going to happen in 6 to 36 months time... and, thankfully, both pictures are becoming clearer... and it appeals to my inner-geek that it is so complex.

My objective goes way beyond calling a crash. I need to establish when and where the housing market will bottom... and to do that for various geographic regions and house types - to some degree of accuracy... not in absolute terms, of course. Not only that, but I want to estimate the fallout for various demographics and industries... national and export markets. I need to establish if I can live in the UK; if business is viable in the UK (which looks tricky at the moment) and what the future holds in general.

I know this is towards the extreme end of interest in the housing (or, rather, mortgage) bubble - but it is my motivation. If I get it right, I secure my childhood dream of a substantial home and the capacity to dictate the terms on which I'll work. If I get it really wrong, the consequences don't bear thinking about.

[[ Out of interest... Alice, which bit of London do you live in, and what do you do that keeps you there? ]]

Alice Cook said...


You ask about where the market might be. Forecasting is tricky, but I will tell you what I expect. I reckon prices will fall 9-10 percent from the peak, which was October. So far, we are about half way there, with another six months to go.

On the deposit question, there is some data from the ONS which shows that in the aggregate, you are an exception. I have thought about posting this data, but the numbers are a little extreme, I had I have wondered whether I properly understand the data. Anyway, what it shows is that in terms of non-housing, non pension wealth, the vast majority of UK households haven't got two pennies to rub together.

I tell you what, bear with the blog for a week, and lets come back to these issues. I have couple of ideas for a post that might make you think about the long term movement of prices.

Finally, on my personal location, you will understand a certain desire for vagueness. However, lets just say if you were shopping in Brent Cross, you might unknowingly run into me. Family considerations determine the precise location.


Vodka drinker said...


Where are you thinking of buying, assuming that prices settle to your satisfaction?

Vodka drinker

traderboy said...

alice, i think you've hit the nail on the head saying "in terms of non-housing, non pension wealth, the vast majority of UK households haven't got two pennies to rub together."...combine this with a Bank of England that will not be cutting rates for the foreseeable future, a banking industry that realises it can continue to raise rates on its mortgage products, and a lack of borrowing options about 90% LTV, and you have the recipe for a HUGE, long-term fall in the market from current levels.

Are you suggesting that prices only fall 10% from here in total? Seems very optimistic.

I think we could see all the gains of the last decade wiped out eventually (in nominal terms, never mind real terms)...I know of property back in my home town that 10 years ago was selling for £10-20k and was recently selling for £140k...there is the potential for some huge percentage drops in the market.

aSteve said...

If we only see a 10% fall from peek, then I will be very disappointed – that would, likely, prompt me to leave the UK. I am expecting at least 20-25% (my life-plan kind-of needs this) and would not be surprised if we saw 25-50%. Of course, these figures are not entirely helpful unless we declare the metric. Halifax & Nationwide, for example, will never provide a usable figure from peek to trough – because they average aggressively. Another issue is that I expect to be paying more than the current average house price when I buy... the difference won't be the monetary amount I will spend, but the property I get for that sum. If the average transacted house costs £200K – and this is a 2-bed Wheetabix affair on a postage-stamp plot on a housing estate... then someone pays £250K for a spacious detached stone-built house in pleasant surroundings... does this have an upward or downward effect on house prices?

I am very interested in the idea of distribution of savings among demographics. If I had bought a house in 2003, for example, I'd have no significant savings now – because I'd be working on reducing debt... conversely I'd not have a house purchase yet to make – hanging over my head as a daunting future expense. I would not be surprised if the vast majority of people have been coerced by the threat of ever-rising house prices to buy at over-inflated prices during the last decade... but there are people who have resisted because they didn't see value in real-estate propositions while we had low interest rates and lax credit.

Alice, I wasn't looking for you to divulge an address to a stalker – LOL – just curious as to what level of London-ness you considered normal. I think there's going to be a major upheaval in central London – as the major employment sector suffers what might be the greatest single blow in its history. I can envision some pretty dramatic outcomes for many.

For myself, I'm pretty flexible about where I live. At the moment, I'm in Bath – after two addresses in Bristol from 1999 to 2007. To buy, rather than rent, my criteria require me to be within 45 minutes commute from at least one (preferably several) cities... South of Birmingham. I've been looking at places like Cirencester; Chipping Sodbury; Charfield (I didn't pick them just because they begin with “C” - honest!) More important than macro-location, for me, are likely commute times; micro-location (i.e. pleasant surroundings) and space to work from home without a home office encroaching on my private space. It might make sense for me to be either further East on the M4 (nearer London) or further West (in South Wales, maybe).

Anonymous said...


Interesting debate but I think you are measuring it the wrong way around. Here's my view:

- Housing is a socially stratified good;
- The richest people, on balance, live in the best houses;
- If you earn above the median wage you will live in a above-median house.

The main distorting effect of the housing bubble is that it allowed people to borrow into buying a house there social status wouldn't allow in sane times.

The impact of everybody doing that meant you had to borrow loads to fight of the bidders below you on the social scale.

The classic prisoners dilemma of everyone standing on tiptoes and nobody seeing further.


Anonymous said...


For what it's worth here's my opinion on the to-UK-or-not-UK question. I personally have everything I own in cash (about 1yrs earnings), no unbreakable commitments in the UK, and an escape route already set up to Japan. I'm ready to leave the UK the minute things go wild. I hope I don't have to because I want to settle here.

- Housing market down 50% peak to trough.
- Even high end London goes down once the Russians, Arabs and Chinese find a better destination for laundered money and more creative ways to avoid OFAC;
- Mayhem in the City. About 10-20% job losses;
- Immigrant labour dries up and they leave (except the welfare scroungers);
- Net population decrease, but a overbalancing of too many coffin dodgers and not enough working age;
- Shrinking tax revenues for at least 5 years;
- Eventual public sector insolvency and cuts, fought by the unions trying to push the cost onto the private sector, who eventually rebel
- Deep societal divisions especially betweeon young-retired, public-private, employed-unemployed;
- Massively reduced consumption of luxuries including driving, eating out, nightclubbing and gadgets;
- Attitude shift towards thrift and saving;
- UK continues it's decline in the OECD rankings, but probably only by a few spots;

Next post is strategy


Anonymous said...

All, if you're still reading. Here's comments on what I think smart people should do:

- Accept that the only good things that will happen to you in the next five years will be because you made them happen;
- Take risk seriously. Consider all aspects of your life in terms of how robust you are to negative shifts

With this in mind, some specifics...

- Minimise all fixed costs. Most important is don't sign up for any large, long term debt contracts such as a house, a car, or even an expensive mobile phone;
- Be able to "trade down" to humbler means if you lose your job. It's best to limit your reliance on savings;
- Try very hard not to get fired in the next 12 months;
- Don't take the bait of more money/opportunity at a new job unless it's a more secure company. It'll be last-in-first-out this year;
- Sell all assets and put proceeds into cash. Preferrably different currencies and in different banks;
- The exception to the above is if you hold gold;
- Expand your employability. Do not focus on skills that are company and industry specific. E.g. who is going to hire a structured debt analyst in 2009?
- Be psychologically ready to abandon ship if the government starts taxing higher and ruminating about capital controls

It sounds like disaster planning but I think it's about limiting risk and maximising opportunity. I expect house prices to drop 50% and then I'll buy. But that won't be for about 4 years. In the meantime the very LAST thing you want is a mortgage tieing you to one location and one huge fixed expense - when jobs might move somewhere you can't follow, or disappear entirely.


aSteve said...


I'm still reading - and think much of what you say makes sense. Here's where I disagree.

Gold - it's for fools - it used to be money. (N.B. You can't counter this by showing me people who've gained... I can show you people who gained by doing the lottery and scratch cards. It doesn't make them a valid financial strategy.)

Taking career risks. I think now is as good a time as any to take career risks... especially if you're debt free and have little geographic constraint. I don't buy into the rampant inflation argument that gold proponents usually endorse... but I do see significant wage inflation prospects... paid for by a devalued currency... in harsh economic times, however, these will not be automatic... you'll have to take risk and put in effort to secure them.

I see at least as great a risk with playing it safe with your job as playing for everything. With the former you risk loosing out substantially to inflationary pressures... whereas the worst case scenario with aggressive action is to have an employment void. Find the man who's got a half-million pound mortgage; feels stressed and under-performs... and offer to do his job for 10% less. Turmoil usually presents opportunities.

Another interesting possibility is the Euro... With it appreciating 12% against Sterling, it begins to look attractive to earn abroad - especially if the cost of living is lower than in the UK.

Anonymous said...


Evidently you have a greater risk appetite than I do. Any improvements in salary get taxed at 50% whereas any loss in principal is lost at 100%.

There is nothing foolish about gold if you already own it. Fiat currency is the fools game. The problem is that gold is in its own bubble right now so if you don't already own it, its a bad time to get in.

Clearly you believe inflation is more likely than deflation, and that wage inflation is possible. I believe neither. I think we are reaching the stage where past inflation is almost entirely reflected in the CPI.

I also think the Euro is headed for a fall.

Our points of disagreement probably point to just how important it is where you stand on the definition of inflation, and your prediction on if it's going to happen.


aSteve said...

Greater risk appetite – probably not. Career wise, I've watched those who took zero personal risks be made redundant in 2001/2002 – while I strengthened my position. Risk and reward are intimately related... and trying to take as few risks as possible often just leaves you more exposed and with less options in future. It is my opinion that the choice is between taking control of things yourself - choosing risks that you can manage – or letting someone else do that on your behalf while taking the rewards if their choices for you pan-out.

If you believe that gold is in a bubble, then you are foolish not to sell. I think gold is a foolish investment because I don't think it is possible to establish if gold is in a bubble or otherwise... because it is non-essential (or counter-productive) in the context of everything I find worthwhile.

I think that the inflation/deflation debate is extremely complex. I'm a biflationist and am expecting near and medium-term monetary deflation... but with narrow buoyant sectors... which will only be exploited by the flexible. Producing convincing evidence of deflation, I think, will be extremely difficult... because today's metrics do not represent the monetary reality – e.g. that vast sums of asset backed securities are almost equivalent to M0, but need not be reflected even in M4... and where 2006 Sterling reforms lead to larger sums in reserve accounts (out of circulation) being included. The proxy measure for monetary deflation, I think, will be reduction in credit availability. I am expecting rising wages, at least among some demographics, in the medium term... 5 years out, say... but inflationary pressures can come to pass in other ways, for employees. While outright pay cuts are unusual, I've seen them accepted; more often I've seen a withdrawal of overtime pay – where employees continue to work stupid hours in a desperate hope to keep their jobs – irrespective of declining real & nominal take-home pay; spiralling domestic costs, pension investment shortfalls and severed perks... and that all ignores bankruptcy of an employer. With employment, it is my opinion that, the apparently safe employment is – if analysed correctly – far from safe. Tough economic times, I'd argue, demand aggressive career moves as much – if not more – than in boom times.

My inflationary predictions:

Cost price inflation is here right now... and the cost of raw materials (oil; steel; copper – and, maybe, foodstuffs too) will continue to rise aggressively for months longer. They will then either stabilise or fall within a year.

Any average wage inflation in Sterling will only arise as a consequence of a devalued currency... which may happen as the international community take a dim view of our spiralling national debt as tax-cuts are used in an attempt to stimulate an export industry.

Asset prices are going down – and the recent stock market rally was mostly attributable to cash that would have been invested in ABS being invested elsewhere...but this was a one-shot deal... since investment in ABS leads to a far more rapid velocity of money than does investment in shares of un-mined mineral resources and un-pumped oil reserves... and a dramatically slowing retail sector will take a heavy toll on the economy as a whole.

I've absolutely no idea where either the US$ or Euro are going relative to Sterling... and I'm not confident about Asian and emerging markets either. I think that arbitrage arguments make it difficult – if not impossible, in general – to make successive valid trend predictions on currencies. Conversely, future currency risk can be hedged. If I had to choose between two jobs for a year – one paying £X and one €Y (assuming all else being equal) the Euro denominated job would look very appealing if the Euro rate was set in 2007... if living in the UK and concerned about the currency risk, this can be hedged cheaply... though, I suspect, I'd just take the chance on it... because, over the long run, gains and losses from such risks cancel each other out.

Anonymous said...

I appreciate the reply asteve

"I'm a biflationist and am expecting near and medium-term monetary deflation... but with narrow buoyant sectors... which will only be exploited by the flexible. "

I agree with this in content, but would use different words. I think when talking about risk we are at cross-purposes. I consider risk something to be actively managed and (for me) reduced. Staying at one employer and hoping they do okay is not reducing risk, it's sticking your head in the sand. That's why I think you should stay only if you think your employer has good prospects.

I'll agree gold is difficult to value. I'm relying on second-order factors to determine the bubble:
- Rapid increase attainable only to more people chasing it;
- Far above historic trend;
- Seems to have occured originally as a safe haven, then later as trend following
- Has become the "taxi-driver tip" indicator of a peaking bubble

Because I define inflation as an increase in the money supply, I think short term CPI rises are the lagging effect of PREVIOUS inflation. I think we are in agreement that, whatever the reason, it's coming down fairly soon.


aSteve said...

I agree with your bubble-analysis on gold, and think you will find this article rather interesting - especially considering the credibility of the news agency. My point is that I'd never be able to see it as a sane buy - only as a sell... no matter what the price.

It might be relevant that I've a strong personal distaste for lottery tickets. If someone gave me one before the draw, I'd give it away. I can't justify investment in gold, but I do respect it as a barometer for currencies. Gold is homogeneous and traded... so, subject to the risk that people suddenly realise how useless it is, its price is very relevant.

We agree about career risk - I just thought it worth pointing out that traditional ideas about risk (i.e. risk of unemployment or missed promotion opportunities) are a red herring today.

We agree that CPI lags every significant event that causes it... though I reject any simple notion that encompasses "money supply" such that a metric can be defined for it. Even the BoE recognise that there is a long lag between economic policy and inflation showing up in the CPI. I suspect it might be around a year - maybe significantly longer. One thing is for sure... CPI inflation is currently out of control irrespective of today's policies... I consider that a natural consequence of an ill-conceived monetary target and failed financial market regulation.

Anonymous said...

Thanks. Read the article.