CRASH 2: Banking crisis? Wait until the UK property bust really gets going….

Bank of England MPC in disarray on rates as new data disappoint

The Bank of England released the latest personal lending figures this morning. The level stayed pretty constant at £1.2billion, but is still 30% below what it was in February. In the same month for 2008, the figure was £7.8billion – over six times higher. This is, however, only the latest confirmatory piece in a jigsaw that is beginning to suggest a property implosion of unparalleled enormity. And the influential BoE Deputy Governor Paul Tucker has signalled his growing conversion to the need for interest rate rises.

The two reasons the UK housing crash hasn’t been enormous to date are (1) the banks have a gun to their heads from government forcing them to be tolerant of those behind on their mortgage payments; and (2) zero-rate interest policy (Zirp) has meant that only a fraction of buyers have actually handed over their keys to the provider.

UK Asset Resolution (UKAR), which owns Mortgage Express, many mortgages from B&B, and some £44bn of “bad” mortgages from Northern Rock is tackling the “forbearance” offered to 44,000 customers last year by reducing monthly repayments to help them stay in their homes. The chief executive, Richard Banks, a former Alliance & Leicester banker, was blunt with the Guardian last week:

“As a kneejerk reaction in the emergence of the crisis and because the government asked us to be forbearing to customers in the hope it would all go away – we as an industry have been too lenient with some customers…..You can see that if you don’t do something about it, there will be a tsunami. If you don’t get into the hills, you could get drowned by this. If you don’t manage this properly, it could get very messy.”

You can almost feel the anxiety in that quote – and, I think, the frustration Banks feels that so few homeowners or policymakers have taken in the level of catastrophe that is coming. New research from shows that 4 out of 5 homes purchased in Britain since 2006 have a value in 2011 below their purchase price. Of these, it is estimated that well over 75% are in negative equity as well. That’s around three million dwellings. Think through the effect on market values, once interest rates go up again, of that many properties coming up for auction. Auctioneers are already reporting sales going through at 40% of the original price paid by the insolvent owners.

Even half of all homes bought over the last 5 years in London are now valued below their purchase price. While this underlines how resilient the capital has been to the property downturn compared to the North and Midlands (where things are already dire) we should recognise that mortgages are on average (because of lifestage and property costs) 40% bigger in London than elsewhere – and thus exceptionally vulnerable to interest rate increases.

It’s also important to overlay onto this picture issues such as under 25 year old unemployment – now at record levels among those relationship-formers who would previously have represented the feeder-traffic into the bottom end of the market. This, too, is especially true of London.

The broader issue of rising unemployment is also one that must be addressed. It is abundantly clear now that, while unemployment has been steady for a while, the fall in full-time contracted employment has been enormous. The private manufacturing and ‘new industry’ sectors of the UK economy are doing well, but at an absolute level far too low to sustain productive growth. The IMF has reduced its 2011 forecast on UK economic growth to 1.75%….down from 2.5% in September last year. Government ministers admit in private that this may be optimistic – 1.4% may be nearer the mark – and that things will get a great deal worse before they get better. Unemployment, many observers feel, will rise further towards the end of autumn this year.

Contrary to expectations, lowering interest rates has not led to increased willingness to spend. Repaying debt has been the trend for some time now. Another sign of this is the continuing slump in retail sales, with increasing numbers of shop chains going into receivership. Thorntons have closed stores, Carpetright profits crashed by 70%, and Jane Norman has gone bust in this week so far alone.

Two weeks ago, UK house prices fell at their sharpest annual rate in 19 months. The acceleration in price falls is obvious, and this may well be connected to the fact that official statistics yesterday showed real disposable income in the first three months of 2011 suffered their most painful annual squeeze since 1977 – 34 years ago, at a time when the IMF very nearly fired the Labour Government from the job of balancing its budgets, and the top rate of tax was 83%.

So-called analysts have consistently underestimated the pace of market contraction. The 4.2% fall so far this year was expected to be 3.7%; this may not sound like much, but it proved to be a 15% optimistic outlook. The Daily Mail in January said the market would be stable.

Rather more reality is available in the shape of the gloomy forecast from investment consultancy CheckRisk, which suggests a perfect storm could send house prices down 20% this year. Even this, I fancy, is a vision of the future stuck in the past.

For me, the problem with so many contemporary predictions is that very few forecasters use their imagination to deal with new circumstances. On top of this, they talk of a ‘perfect storm’, the effect of which they have aggregated. But after a certain balance is tipped, the rate of acceleration becomes exponential. Tired parallel or not, the Titanic’s loss still remains the best analogy: 67% of the submersion of the ship took place in the last ten minutes before it disappeared below the waves.

To each physical data set, for example, one must factor in the effect of micro family bad news, macro economic bad news, and micro market bad news. This is never 2+2+2: more often the progression is (2 x 2) squared. So instead of six, the answer becomes 16. Very few people can think beyond the linear; but most case histories of market panic and economic slump show that such thinking is central to accuracy. After a certain time, the sheer weight of bad news acts like the steel of a liner that is no longer buoyant: the speed is so frightening, everyone is taken by surprise.

In just the last six days, an example has emerged right at the heart of interest rate policy: Paul Tucker, the BoE’s deputy governor, revealed he is close to voting for a rate rise – putting him at loggerheads with Sir Mervyn King, the Governor. A vote for higher rates from Mr Tucker, who many think will succeed Sir Mervyn in 2013, could very easily tip two further MPC members over to his side. To this sensitive balance has been added the Bank for International Settlements’ blunt observation that rates need to rise sooner and faster than expected. While King has been airily talking of Zirp being retained until July 2012, a number of commentators (myself included) think this to be spin: inflation is yet another economic dimension that tends to catch even experienced mathematicians out. UK inflation is already more than double that which King forecast: with a weakening Pound and still struggling exports, it could hit 10% in no time.

My money (as of yesterday) is on a maintenance of what I call Dogmatic Denialism by the US, the EU, and the UK. Debt will not be forgiven, there will be no coordinated G20 strategy on either this or inflation, China is going to find itself the less than proud owner of self-inflicted stagflation on a grand scale, and over-leveraged Russia will struggle in an environment where industrial ennergy needs evaporate. In that context, some major defaults are a certainty – and thus the banking system in its current form will not survive.
For Western property owners, that is the unfactored development. All things considered, I think we will be very lucky if the average domestic property correction this time next year is under 25%.


50 thoughts on “CRASH 2: Banking crisis? Wait until the UK property bust really gets going….

  1. Add to this Nadeem Waylat and his bank your indigestion medicine near by!


  2. Auctioneers are already reporting sales going through at 40% of the original price paid by the insolvent owners

    If things go the way they seem to be, are there going to be any buyers even at 25 – 30% of the original price. At that point is it the case that the lenders ought to consider if leaving the occupier in the dwelling to protect the integrity of their assets


  3. John , now you have really terrified me .

    We have tried to sell our 5 bed property for two years- three big price drops!

    No one wants family homes and a hedge to clip and grass cutting nowadays!

    The Londonistas who view at weekends are to addle headed and idle to take on board the recycling regime that most parts of rural Dorset pride themselves on either


  4. I can certainly understand the thinking.
    But I dont believe the government will give a flying monkies about inflation if the housing market gets knocked out of kilter. I can see the National Mortage Bank being formed and issueing 100% loans of 5% fixed for 25 years long long long before I see Interest Rates up.

    That said, I’m in talks with the local housing association to buy a third of an acre of none maintained ground and I’m sorting out my next fix a year before the current expires.

    But then, I doubt you’ve sold your home, expecting to buy four in a couple of years.


  5. In practice the government cannot allow a slide of the kind you describe. They would become unelectable for a generation.
    More likely some deal will be cobbled together leaving occupiers in place until, eventually, the market lifts again at which point the banks will take action. This is what they’ve always done in the past. Negative equity they take a big hit; just nudging positive equity and they are home scot free and the balance sheet stays intact.


  6. Supposing the Government were to require the lenders to impose a gradually-increasing (say 0.1% per month over the next 2 years) mortgage-rate surcharge, where the full proceeds of each mortgagees surcharge would go into a fund linked to the mortgage that would either provide an extra buffer-fund against default or provide a sum for early redemption?


  7. Good post, on any rational basis the UK property market at present is not sustainable and some sectors are already looking ugly. That a lot of leasehold property now has its management owned by the Bank of America is less than good news. It is being propped up by the flood of “hot” money coming into London from nasty regimes and nastier crooks together with a housing benefit scheme that has run out of control. They are not separate entities. But what exactly will blow the fuse?


  8. I welcome Paul Tucker’s slow conversion to the need for IR rises.
    Where’s he been for the past 4 years???

    The whole darned MPC under Merv has lost its way and become a creature of govt social policy. Brown started that bollix and the Tories are too scared to change it for fear of the unknown/LibDems.

    When it comes to economic growth and inflation, the MPC’s sole duty to attend to is the inflation part; economic growth is the business of govt. It has failed to do this. Merv’s policies have failed. He needs to go.

    The actual effect of higher IRs on homeowners is much speculated about but poorly known. In any case, many of those who would be affected will have taken their mortgages out before 2007 (perhaps trying to cash-in on rising values) and due dilligence was their responsibility, not the taxpayer’s. At the time, their mortgage repayments would have been much higher than now.

    The other issue is that if property values fall after IR rises etc, it opens the door for new waves of 1st time buyers, currently locked out of the market on price grounds. Swings and roundabouts.


  9. BT
    But governments always defend the status quo.
    Everyone with half a mind knows that virtualy every branch of government is broken, but no one is prepared to take on vested interests.

    House prices are out of kilter, but letting them fall in nominal terms leads to a whole lot of hurt for the status quo.


  10. For the record,the top rate of income tax in 1977 was 98 percent,after Healey’s investment income surcharge,on monies devalued by 29 percent inflation in 1974 .You could buy a decent 2 bed kensington flat for less than £20k in December74, a one third reduction on the price a year earlier.We are in familiar territory.I guess King must have skipped the economic history part of his degree and not learnt that history repeats itself.


  11. The UK market was arguably more over priced than th US before the crash. But the US market is now down 33 percent from its peak nationally and 50 percent in some markets with 1 in 6 houses foreclosed. It has further to go southwards, perhaps 10-15 percent over the next 2-5 years.

    The UK ,market is only down 10-15 percent from the peak on average. So another 25 percent or so is very feasible if rationality ever returns. Another reason the govt wants inflation and lots of it!


  12. Excuse me John these are not a commodity, they are our homes, you cannot devalue the love of our families with all your numbers. The reason the market has stalled is because there is no money available to borrow. The banks are still in the casino. Many ( not all ) of your nasty defaulters are honest families all made unemployed by your Camembert friends. Please consider there are families involved here trying to survive while the banks rape their cash. Direct us to be positive instead of reducing property to rubbish – that will achieve nothing for UK or families.


  13. Sir,
    I agree with most of what you say – but remember that the UK government has believed in market forces for a generation now. The markets have no interest in families, or where they live for that matter – the only thing a market is interested in is a profit. That can be from higher prices or by shorting the housing market or the dollar or … anything else for that matter.

    Honest families just disappear in the turmoil of disrupted economies.

    It is a pity that governments have not sought to put families first. It was one of the motivations for me to move to the Netherlands: having a very good schooling system implies more than well educated children. It implies a government with a focus on the society that votes for it, not always the one that pays it.


  14. I don’t think we can even discuss house prices with any sort of normal rationale. I have argued this subject with all sorts of people and while they can’t dispute the facts as I present them they all have the same conclusion, house prices will pick up again very soon??????? Even putting everything else to one side the home owning demographics tell a different story.
    I believe government are running a policy of outright support otherwise known as ZIRP. With housing making up a significant proportion of national assets having a correction would possibly render triple A government rating a thing of the past! Not only that allowing interest rates to rise would impact onto any meagre disposable incomes people have now and in a consumer driven economy that is the last thing they would like to see. At a time of what I think is really double digit inflation a squeeze of this kind would result in people on the streets here!
    Having said that I do believe there is a huge correction about to hit and 20-25% just doesn’t cut it. If average salary is about £26K and average house prices are £165K we are still way out of whack. Getting back to a mortgage based on something sensible like 3-3.5 times salary the average house should be around £78-£91K or around a 50% drop from where it is even now! To get to that stage it has to drop further in the short term, because that’s the way these things work, before settling.
    London, like all capital cities, has to be taken out of the equation, they are bubbles in their own right and in no way represent any sort of national trend.
    As the North has been mentioned I have just read an advert of a final notice repossession sale within 5 miles of where I am sitting writing this. 2 bedroomed terrace and the best offer is £10K. OK it’s not the most salubrious area but it ain’t downtown Beirut neither. A friend’s son has just signed his and his partner’s lives away and paid 10 times that for the same type of house 2 miles away. Location, location, location is all very well but I know what I would have done, a good view doesn’t put food in your belly and that’s what it is going to be about soon!


  15. “Merv’s policies have failed.”

    Yes, but whose hand was down his trousers exercising a not too gentle squeeze if he looked like going native. I doubt that Cameron’s grip is any less firm than Brown’s.


  16. If the UK and International Pension Funds had stepped into this market years ago to buy some housing stock to rent out it would have helped to stabilise the market as well as the poor repossessed who will soon end up next door and on housing benefit anyway.
    Unfortunately this type of investment is too transparent and not nearly as sexy as the international casinos that they prefer to play in.
    Family pensions are just another name for victims funds to gamble with, live the millionaire lifestyle and pay out a pittance on maturity.


  17. The prices in downtown Beirut rival those of the betetr parts of London. That’s one reason you have so much Arab money here right now.


  18. Tough luck on anyone who made the decision to buy a property in recent years, particularly those expecting prices to keep going up. But all the warnings signs pointing to a house price crash were there.


  19. What on earth makes you think its going to lift? In the last property crash property was in the doldrums for almost a decade. This is far worse. Also you are creating a false market for people who could afford to buy at the reduced price. We same to have created a society where no one is allowed to fail and there is a limit to how long you can kick the can down the road.


  20. Interesting to hear, Mac, that you’ve had the same frustrations trying to get your point across on the housing market. It’s like they’ve been brainwashed. People think it’s a never ending gravy train.
    Most of my friends and my girlfriend think, to this day, that I’m a complete crank and clueless because I thought the housing market was overheating in 2003. I told them so and have continued to warn of a crash for 8 years now. I desperately tried to talk my best mate out of moving up to a big 5 bed in the home counties, last year, taking on a massive mortgage. He thinks I’m a doom merchant and have lost the plot. He’s a Financial Advisor!!!!
    I still think i was right though and that what has come to pass since 2003 is the “bubble” that we will see burst over the next 12 months.
    I’m no economist or intellectual but by using normal(sensible) multiples of 3-4 x salary in 2003, I thought we were at the top. Although, in a selfish way, I hope my argument be vindicated, i don’t wish for the misery that is to come.
    The really scary part is that even with everything that has gone on since Lehmans 2008, the majority of people think prices will never go down. Or at least not by much. Where have they been? Unless you’ve been on the moon you should know that the cost of living is soaring, we will face shortages of energy and commodities which will exacerbate things. Interest rates will rise. Yet nobody has any idea of this. A nation of morons, almost.
    Which brings us full circle back to the media and the propaganda they spout. A constant tide of spin, half truths and manipulation. It will all end in tears.


  21. Western housing markets: The 2015 big collapse… begins from 2012
    Three trends are now converging, enabling to anticipate a collapse in property prices (of at least 30%) in 2015 in most Western markets which have risen sharply in the last ten years: . The first trend is demographic, and therefore inescapable in such a short term: the retirement of the core of the baby boomers. . The second is tied to changing interest rates in most Western countries which, as a result of the Western solvency crisis and the failure of the policy of liquidity injections, will rise sharply. . The third is related to the inability, for lack of available public funds, of Western states to counteract the two previous trends.
    LEAP/E2020 (Excerpt GEAB N°56 – June 16, 2011)


  22. No-one knows whether it will lift-but by then the politicians in charge will have retired to their consultancies with the banks whose backsides they saved in the meantime.
    It is simply another case of kicking the can down the road so the worms inside don’t spill out on your watch. The same, effectively as the Greek can-the Greek government can pass all the law it wants, the people will decide if they obey it.
    In the long run, economics always trumps politics but in the short run it is frequently the opposite. As Keynes said-in the long run, we are all dead! il i


  23. In the area that I am looking to buy a medium-sized house for cash (mid-Derbyshire in the countryside), the fall has only been around 10% so far. Sellers are certainly in denial, with them determining to hang on for many more months (or even more) without a sale, rather than biting the hand off someone who comes along with cash in the bank, but offering 15% less than they are currently asking.


  24. TB
    Reposition it is either a B&B or ripe for development into an old people’s home. It will sell within days.


  25. Singing James
    You misunderstand me, old top: the sooner our houses become homes again, the better. There’s nothing I’d like more than a housing market returning to the 1950s, where a home was a cost centre, not an investment.
    Defaulters nasty? Far from it – they’re heroes…be they Athenians or Wayne and Kelsey Comprehensive from Burnley.
    It’s not my job to make you positive. My mission is to help you resist the mad bastards.
    Camembert friends? You sound like George Bush.


  26. Agreed. I pretty much wrote that…I expected the incoming Coalition govt to begin resetting IRs to more normal levels after seeing that Brown only lowered them to save his own cowardly skin. But they haven’t. They’re either scared of the unknown or it’s the LibDems.


  27. @TB:
    FWIW on the 3rd May I put my late father’s home in East Sussex on the market at a price £25-£30k higher than I thought it was worth in the current market.
    We had four pretty-much-full-price offers inside 18 hours. Sale completed 10 days ago. Every buyer was middle-aged or older with cash. There are pockets of demand out there…..


  28. Fascinating comment, this one, o Daniel in the Spanish Den.
    2003 was the year when I returned from France in July and looked at some prices in the local estate agent. They valued my house at such a ridiculous sum, I decided the world was due another bout of insanity.
    The following day, I went to a nearby market and discovered one could buy a lifetime supply of Chinese or Indian underwear for £5.
    Life has never been the same since: I founded the blog Not Born Yesterday, and the rest is mystery.
    One of the first posts was a request to Greenspan to raise interest rates to cool things down. He didn’t reply, and if there’s one thing I can’t stand, it’s bad manners.
    Your financial adviser chum, by the way, is very much par for the course. Much of the time, we are being sold investments by folks who failed the Unilever salesman course in 1977.


  29. Also, the important point I need to make is that the BoE/MPC were declared “independent” by Comrade Brown to fool people.

    Merv is a well informed man who understands banking et al and he should have walked into Brown’s office 2003-4 when the housing market took off and personal credit was rising unsustainably and told Brown: “I need to raise IRs to cool down your housing/credit boom else we are headed for the rocks big time. If you don’t widen my narrow CPI @ 2% remit and allow me to take a broader view, I’ll resign and go public.”

    Brown was always a coward and would immediately have caved in.

    Merv failed to do that. He sat back watching housing/personal credit go through the roof and did nothing. We are now paying the price.
    He needs to pay the price for his irresponsible actions.


  30. “Please consider there are families involved here trying to survive while the banks rape their cash.”

    With ZIRP, it’s not clear to me why you think homeowners are being raped by the banks. It’s depositors/savers who are being raped by the banks and yet they played no part in the finc fiasco.


  31. I don’t elect a govt to maintain the status quo when it’s obviously based upon insanity.

    A vast majority of those with mortgages now sunning themselves on ZIRP took out their mortgages when IRs were much higher. A steady rise in IRs back to sane levels should not affect them.
    Those who took out mortgages since the Crash at ZIRP and expected IRs to remain at ZIRP forever are clueless and failed due diligence. They don’t deserve the finc help of taxpayers and savers.

    Getting housing away from being the UK’s ~main economic driver as it has been for several decades is a good thing and abandoning ZIRP is a part of doing this.


  32. Oh dear, that old chestnut of exponential growth…

    For those of you willing to brush up on it, here’s a link to a brilliant lecture. Stick with it, esp. when he talks about oil consumption. Lord help us.


  33. I can only repeat.
    If HMG gives up on inflation, theres not reason it cannot form a new nationalised mortgage bank, offering 100% loans @5% interest for 5x both salaries.
    See the housing market crash then…..

    I doubt it will be that extreme, but even half that idea turns your dreams of a housing crash to dust


  34. Oops. sorry. Slightly bad investigation on my part as the 2007 and 2010 reports would seem to not be directly comparable as the 2007 report seems to be for a separate smaller fund but, even so, the 2010 number is still a very high percentage in comparison given their view on inflation.


  35. Seems they wont even have to go that far…cash rich FTBs and B2L seem able to soak up the what little supply is available.

    By ‘supply’ I mean homes which must be sold, which are kept to a bare minimum by all the measures we know well, not the jokers who market their homes for 2007+20%


  36. “Much of the time, we are being sold investments by folks who failed the Unilever salesman course in 1977.” I love it! You’re so on the money.
    The same FA asked me earlier this year whether I’d be prepared to invest in a US fund(he’d heard some soundbite in the media that the US was the land of growth and honey in 2011) and I said no. “Why?” he asked. “You don’t think the debt’s an issue?”. I said. “What about it?” was the response. I mean, you couldn’t make it up.
    So your anger and frustrations also started in 2003, John. Fair play to you for starting out on the road towards this brilliant blog and doing something about it. My anger has just festered but this is why, since I’ve found this site, your writings strike such a chord with me. Especially about the media. It’s why I left. When the horror of the past 10 years unfolded before our eyes with all the immigration, Lisbon treaty, PC culture, dumbed down education, scumbags charter, morality, discipline etc, etc. I could go on!
    For me the failure of any section of the media to question what was happening left me furious. It was if none of it was happening, we lost all right to rational debate under the Labour Stasi and the media just went along with it. Nobody championed the rights of the people or had any interest in how we felt. It was like we were living under some sort of government/media cabal where the genuine issues were like some kind of dirty little secret that nobody was allowed to talk about. Yet nothing has changed.
    Half the problem we see today with the public sector strikes is because nobody(camerlot) has the “cojones” to fully explain(in Janet & John if necessary) the shocking state of the nations finances. It’s as if they want to keep the people in the dark, in case anyone dares to ask any awkward questions. Like lemmings marching obliviously to their doom. Sad really.


  37. Quite so DaninSpain.
    And one must not ignore that the broadcast media in Britain has some very tight rules about how it reports news. ‘Balance’ is a necessity.
    That has lead to the socialist BBC and Sky employing f*ckwits to report news who don’t bother to investigate the truth because they’re inadequately trained and not allowed to report it anyway. Their role is increasingly limited to reading out official press statements issued by the huge army of unelected officials from agencies of the State.


  38. I totally agree, Bankrupt Taxpayer. Although not sure if I see too much of the necessary “balance”.
    I had to stop watching the BBC about 10 years ago as it was getting too expensive down at the local TV shop. Haven’t seen it since. As for Sky News, well don’t get me started. Their epic coverage of the death of that freak Jackson was almost enough to give me my own “Columbine” moment down at Sky HQ. Can’t stand them either. Tossers, the lot of them!


  39. Chris,
    I think that your observation is typical of much of the property market in England (not sure about Wales, Scotland or NI, as I suspect that there are local factors at work there – fewer Daily Wail readers maybe?).
    I moved house last year, from North Kent to North Hampshire, and I spent about 6-9 months looking for a home, not just a house. A dwelling with rooms that I could use for what I wanted, and in an area that I felt comfortable in and was convenient for my lifestyle.
    I went to my absolute max. price, buying new in the end, for a number of unrelated reasons.

    I doubt if I have bought at the ‘right’ time, but my back up plan will be (1) rent out a spare bedroom (: up to £354pcm tax free) and if the brown stuff really hits the blades, (2) to rent the whole house out and go and ‘live’ in my static caravan. Plan B(2) will depend upon my Building Society approving the rental and my boss letting me “work from home”…even though its 200 miles away from the City…


  40. “not sure if I see too much of the necessary “balance”.”

    You’re right. “Balance” is one of those terms implemented in whatever way the BBC/Sky see fit. A bit like the definition of “reasonable” used in so many British laws.


  41. There is one part of the UK were house prices have crashed (and could still be crashing) Northern Ireland. Their house prices have crashed to about half the 2007 peak as can be seen from this chart of historic average house prices in England and Northern Ireland. Its interesting to note as well that house prices in Wales have stagnated since 2006 as showed in this graph of historic average house prices in Wales and Northern Ireland.


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