| Rates | Close | Change |
|---|---|---|
| Oil | 118.56 | -0.79 |
| Gold | 893.4 | -1.3 |
| $ to £ | 1.9901 | 0.0051 |
| € to £ | 1.2718 | 0.001 |
| $ to € | 1.5648 | -0.0009 |
Oil, gold, pound, dollar, euro, 2008-04-28
Nationwide drops 95 per cent mortgages
This is why we have business cycles.
The Nationwide, who for so long talked up house prices, has doubled the size of the deposit required from mortgage applicants to 10 per cent of a property’s value.
Meanwhile, Abbey is now only to offer interest-only mortgages for loans of less than 50 per cent of a property’s value.
In truth, you can’t blame either of the lenders. Take the example of Nationwide’s decision to limit mortgages to 10 per cent of a property’s value. Now suppose house prices fall by 11 percent from the date the property is purchased. The mortgage owner will then be sitting on 1 per cent negative equity.
Think of it in those terms, and all of a sudden it feels as if Nationwide is being too generous.
So maybe, despite all the criticism levelled at the banks in recent months, the Nationwide is trying to do its bit to try and stop a full blown crash.
Even so, the fact is that the moves announced yesterday, along with all the other decisions we have seen in recent weeks to scrap 125 per cent mortgages, then 100 per cent, came about two years too late.
It was the easy supply of credit that drove house prices too high in the first place. Now they are falling, all that will be achieved by tougher lending conditions is even faster falls.
As for Abbey’s decision regarding interest-only mortgages – the whole concept of interest-only mortgages was always highly dangerous.
Banks don’t lend money to individuals like you and me so that they can speculate – or so they say. If you want a bank loan for a business, you have to demonstrate it is a banking proposition – and that usually means showing your sales projections are based on what you have done in the past. Banks don’t like it if you say, “By spending more here, we should get more sales.” That is called speculation.
Yet they have been more than willing to provide mortgages on massive loan-to-value ratios, presumably because they were assuming the asset would rise in value. In other words they were speculating.
That is what drove house prices too high.
And now the lenders are pulling back.
It has a feeling of symmetry about it, doesn’t it?
Negative equity fears overblown – or are they?
According to a report in the FT over the weekend, if house prices fell by 10 per cent, then actually only 2.8 per cent of houseowners would fall into negative equity. Even if prices fell by 15 per cent, just 5 per cent of owners – or 0. 5million households, would face negative equity. In fact, it is argued house prices would have to fall by 25 per cent, which would then push 1.8 million households into negative equity, before one would say there is a full-blown crisis.
The pink’n headlined “negative equity fears overplayed.”
This data may well be right – but the article misses the point – on two levels.
Firstly, it misses the point because it’s how people on the margin are affected that can influence an economy. If prices fall by 10 per cent, it says, then 0.3 million households will face negative equity. Well if those 300,000 people then drastically cut back on expenditure, the economy will slow markedly.
Secondly, it misses the point because the reason why so few will be affected if prices fall by 10 per cent, is because there have been so few first-time buyers for the last few years.
House prices have been driven up by buy-to-let investors and people buying second homes, who have used the spare equity in their other property/ies to find the deposit.
In short, people have been using the gains in asset prices to buy more assets. And because they have observed prices rising – they have been persuaded the rises will continue, encouraging their additional purchases. These are the classic hallmarks of a bubble. When bubbles burst, the speculative motives that drove prices up, tend to go into reverse.
The debate is now over as to whether house prices will fall this year. The question is now, by how much? Markets that were driven up by speculation tend to over-correct. For that reason, a 25 per cent fall in house prices is possible – meaning the spectre of mass negative equity has not gone away.
Bush fires the big gun and says cheque is in the post
Later this week when Mr and Mrs America get home from work there will be a nice surprise sitting on the doorstep: a nice big juicy cheque for $1,200 for them to spend as they like, courtesy of the US government. This is the big one, all the other measures taken up to now, in comparison, are child’s play. It’s a big gamble, sure, but in trying to boost the economy this way, George Dubya and his advisers are doing exactly what Keynes would have recommended.
It’s a shame of course that the British government can’t do the same thing – because if there was one thing that could kick some life into the UK economy right now it would be a massive, one-off, pay day for all households. But you know the reasons why they say the trick can’t be repeated over here.
But this begs the question: will the big tax credit do the trick? The answer to that is important, because it has implications far beyond the US.
Actually, there won’t really be a cheque waiting on the doorstep – the money is being transferred electronically. Furthermore, a mere 7 million rebates will be leaving the government’s bank account. The rest of the 117 million households will have to wait a little longer. May 9 is the day marked on the calendar for the cheques to start going out, and at that point it really will be a case of sending the cheque in the post, so let’s hope the White House has got lots of self-adhesive envelopes and stamps, otherwise George Dubya will soon run out of spit.
Individuals will be getting $600, and couples $1,200, in a move that will set the government back around $160 billion. In the long run, of course, taxpayers will be paying for the credit, so in effect the government has decided that all taxpayers are to borrow against future earnings.
But the move does have one important feature. The tax credit is not dependent on earnings. In that sense it is like the complete opposite of the tax that brought Mrs Thatcher’s reign to an end – the poll tax. But this is a poll credit.
So actually, although the US taxpayer will be no better off in the longer-term, the rebate will have created a massive re-distribution effect – so in a way, George Dubya has taken on something of a Robin Hood persona.
But, then again, it is what Keynes would have diagnosed. His reasoning went like this: when debt is high, cutting interest rates is not the way to get the economy moving. Or to put it another way, you can’t solve a problem of too much debt, by getting people to borrow more. It would be akin to “pushing on string,” said Keynes. Instead, he said the answer was to hand out more money to people who tended to have a higher spending to saving ratio – the poor. Get more money to the poorer folks, and they will spend it – and the economy’s lifeblood will start flowing again. Give money to the rich, on the other hand, and they are more likely to save it.
That, though, is a problem this time round, because the poor US households, struggling with their sub-prime mortgages, are, on this occasion, also quite likely to save the money.
And therein lies the big doubt with the move. Many economists fear that the majority of the money being handed out won’t be spent at all, rather it will be saved – or used to repay debt – and have a negligible effect upon the US economy 2008.
In fact, if the famous Sheriff of Nottingham from King John’s time was still alive today, and was now practising as an economist, he might even have advocated giving more of the rebate to the rich.
But actually, even if all the money was saved, rather than spent, it would be no bad thing in the long-term. Just like the banks, US households need to shore up their balance sheets.
US and UK banks might not be passing the new money handed to them by central banks on to customers in the form of lower interest charges – but they are repairing their damaged balance sheet.
That’s why neither the big US tax credit, nor the efforts by the Fed and Bank of England to resuscitate the money markets, may be enough to save the economy in 2008, but they should be enough to bring forward the eventual recovery.
But why can’t the UK repeat Dubya’s trick
But is the UK government really so powerless?
In the US, $160bn is winging its way to households, and George Dubya said the government “recognised the signs early and took action.” Even so, many fear the action taken could be too late.
If, on the other hand, you believe the UK is running around 12–24 months behind the US, the right time for a similar tax credit in the UK is probably now – or maybe a few months’ time when the election is a little closer.
But, as we all know, the UK government can’t afford similar measures.
At the end of last year, the US had a budget deficit of 1.2 per cent of GDP (Gross Domestic Product). The UK’s deficit, on the other hand, was 3.1 per cent of GDP. Germany’s deficit had fallen to a mere 0.3 per cent of GDP; even the deficit in France, at 2.4 per cent, was lower than in the UK.
Britain has blown it. We could be seeing the imminent end of the longest ever run of economic growth – and we haven’t put anything aside.
Well, yes that’s true up to a point, but it isn’t the full story.
First off, arguably, government borrowing is one of the reasons why we haven’t had negative quarterly growth for such a long time. Earlier this decade, when the US and Germany both hit recession, the British economy merely slowed. Why? It seems there were two main reasons. Firstly, after a certain amount of creaking, and after blowing away the cobwebs, Gordon Brown opened up the vaults, and spent.
Just remember that. You may say the government should have saved when the times were good – but the times were good, in part, because the government wasn’t saving.
Perhaps the other reason why the UK continued to grow was down to the housing boom. Although experts insist rising house prices do not lead to rising consumption – we just don’t agree.
In the UK, house prices have taken on a significance in the British psyche that is not seen anywhere else in the world. Interest rates did not fall nearly so low in the UK as they did in the US and Eurozone earlier this decade, but we still experienced one of the highest rates of house price inflation in the world – and much higher than in the US.
Economists say the data does not suggest higher house prices led to higher consumer spending – and say the fact that the two rose in unison was because they were both pushed up by the same factors.
But this reasoning seems to fly in the face of common sense. When house prices go up, we feel good; we are more likely to buy Bollie instead of Cava, and we tend to worry less about our pension.
So, there are worrying implications in all this. If the UK grew because the government was spending too much, and because house prices were rising, then what will happen when those two factors no longer work? In other words, how can we get out jail?
Economists tend to argue that the big hope for the UK lies with the falling pound, and exporting our way out of trouble.
But it seems there is another point that gets overlooked.
In fact, of our main economic rivals – that’s the US, Japan, France, Germany and Italy, the UK’s government has the lowest level of net debt.
The latest statistics say the UK’s public sector net debt is 36.7 per cent of GDP. Contrast this with the US, where net debt is over 60 per cent of GDP, or Germany – 64.5 per cent of GDP.
The truth is that the UK’s total level of debt is not as bad as is commonly believed – it is just that in the UK it is getting worse, while in most of the countries mentioned above, it is getting better.
According to a report published a month or so ago by CEBR, public expenditure as a share of GDP in the UK has risen from 39.0 per cent of GDP in 2001/02 to an estimated 43.0 per cent in 2007/08. Meanwhile, in other countries, public spending to GDP has been falling. For example, in 2007 Germany’s public spending as a percentage of GDP was lower than in the UK for the first time since 1974.
Then again, in East Anglia, London and the South-East, public spending as a percentage of GDP is less than 40 per cent. In the South-East the ratio is just 34.1 per cent. By contrast, the North-East, Wales, North-West, and Scotland all enjoy public spending that is more than 50 per cent of local GDP.
So it seems that the UK has modest public sector debt, but high public spending in some regions. What the UK needs to do is build upon the fact it has low net debt to fix the structural discrepancy.
The UK’s Treasury can still bail out the UK, just like is happening in the US. The problem is not that the UK can’t afford to borrow more, rather it is that she hasn’t been spending wisely. It is that which needs to be fixed.
One-in-three chances of UK recession
Unless you have been living on Mars, you will know the last few months have been a bit tricky. But how bad was it really? Now the first version of the official statistics are out. And this is what they say.
The UK grew by 0.4 per cent in the first quarter of this year. That’s the slowest rate of expansion since the first quarter of 2005. The worst performers were mining and the energy sector – down by 5.2 and 1.2 per cent each. Services expanded by 0.6 per cent, and manufacturing by 0.5 per cent. Construction expanded by 0.5 per cent too.
The annual rate of growth was 2.5 per cent, the slowest rate since the final quarter of 2005.
So far then, it’s not good, but not that bad either.
Looking forward, the falling pound should help manufacturing, but then again surveys are suggesting that despite improving exports, the sector is still struggling.
With news last week that Persimmon has put its plans for building new homes on hold, it seems likely that the construction sector will not continue to expand – indeed it could contract quite sharply, while plummeting consumer confidence is bound to mean falling consumer spending – which will drag both services and manufacturing back.
Capital Economics says it “expects growth of around 1.7 per cent this year to be followed by just 1 per cent or so in 2009, with a significant chance (perhaps 1-in-3) of a technical recession.”
That one-in-three chances of a recession is a tad worrying. This time last year Alan Greenspan put the chances of a US recession at a similar level – and we all know what happened next. If the UK is set to follow the US downwards, then the next few months should see growth projections downgraded again.
The next few months, then, will tell us a great deal.
The return of the Mortgage King
Gordon often likes to quote Alan Greenspan. If you are actually able to stay awake long enough to listen to our Gordon, you will hear him saying things like, “Alan Greenspan says,” “Alan Greenspan agrees with this,” “Alan this,” “Alan that” and “three bags full Alan.”
But actually, the two men did differ in their views in quite an important respect.
Earlier this decade, Gordon Brown tried to promote fixed rate mortgages, that’s really fixed rate – fixed for their entire term, or at least ten years.
These types of mortgages were much more popular in the US and continental Europe – but the Brits never really warmed to the idea. Poor old Gordon, he had the right idea – it is just that no one was bothered.
In the US, on the other hand, Alan Greenspan encouraged the take-up of variable rate mortgages. It is interesting, he gets slated in the press for dropping interest rates so low, but maybe his biggest error was the support he gave to the shift away from fixed rate mortgages.
But now, it is all change.
Citibank reckons 2008 will see $460bn-worth of adjustable rate mortgages reset – and it seems we will see a flight back to fixed rate mortgages.
It has already begun.
According to Bloomberg, a record number of mortgage holders have been dumping variable rate mortgages in exchange for fixed rate mortgages. Apparently, re-financed loans will hit an all-time record this year, and 90 per cent of the new packages will be for fixed rate mortgages. It will mark the biggest ever exodus from variable to fixed rate loans.
It’s a shame we can’t rewind the clock back.
In 2004 Alan Greenspan said, “Homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages” and “the traditional fixed-rate mortgage may be an expensive method of financing a home.”
These days, Mr Greenspan denies he was against fixed rate mortgages – but when you are as influential as he was – and still is – you have to watch your words closely.
When the story of this economic chapter is finally complete, it seems that Mr Greenspan’s words of 2004 might well be held up as one of the main causes of the crisis that followed.
HBOS prepares its answer to week of rumours
In times like these, rumours and counter-rumours are the staple currency. Sometimes rumours take on a momentum of their own, even when they don’t appear to be based on any kind of truth.
This is a key week for HBOS. It seems that the bank may well be announcing big write-downs and revealing plans for a rights issue.
But does that mean HBOS is another Northern Rock in the making? It seems unlikely; the bank does apparently have a stronger capital ratio than any of its main rivals. But that is what the rumours said – shares plunged – the bank denied the rumours, in the end the Bank of England got in on the act to try and reassure everyone.
Trouble is, track-records are not good. We have been told banks weren’t in trouble before. We have known about the credit crunch now for getting on for a year, but only now are the banks making their write-downs. They hopelessly misread the signs and now, in addition to the liquidity gap, there seems to be a credibility gap too.
HBOS does include the giant mortgage lender Halifax – and so that has led to increased worries that the bank is over exposed to the UK property market.
But the fact remains that this is a bank with a strong capital position – as that famous banking analyst Mark Twain said, reports of the bank’s death are greatly exaggerated.
Yet, regardless of how strong the bank’s balance sheet is, there is another issue relating to HBOS.
The monthly Halifax reports on the property market were amongst the most bullish, and were perhaps a major factor behind the buy-to-let boom of recent years that must have surely pushed prices far too high.
As such it has a certain amount of responsibility.
It may need a rights issue to help shore up its balance sheet – but the bank also needs to right the issue of mortgage holders whose original fixed rate deals are coming to an end, and who can no longer obtain mortgages that bear strong correlation with rates set by the Bank of England.
