British Banking/Housing

[rffrydr]

From the broker:

Looking at the UK Housing Market
With the problems brewing in the UK banking system, some are questioning the stability of the British financial structure and furthermore the possibility of on going rate hikes. Going forward, the situation in the housing market will remain instrumental in determining future monetary policy.



UK home prices remain at their all time highs. According to the BBC, the average cost of a home is Stg.210,578, up 9.25% from last year. Furthermore, the Rightmove Asking Price index hit all time highs in August. Though these gains have been consistent, they have been decelerating. The Y/Y growth rate in the Nationwide House Prices index has fallen off its 2003 highs. The graph below exhibits the trend since 1992.

Nationwide House Prices: Monthly 1992-2007



While the index did pick up some steam at the end of 2006, there has been some recent consolidation around 9.5%. The pick-up in housing prices was a function of the growing business in innovative mortgage products. According to a Halifax press release distributed in 2001, “UK borrowers benefit from having a wide choice of mortgage products, including variable rate loans, discounted, fixed, tracker, capped, and 'cap and collar' mortgages. In contrast, over two thirds of mortgages in Europe are fixed rate loans.” It is estimated that from 2002-2005 over ¼ of the loans made were adjustable. Lower loan standards and a diverse array of mortgage products encouraged aggressive lending. Loans for house purchases increased to Stg. 9.192B in July of 2007 from Stg. 3.431B in January of 2000. The data on mortgage approvals also expresses how the changes in lending standards encouraged the boom in the real estate sector. Approvals surged from 1.7B in mid 2001 to 6B by December of 2006. The changing housing climate in the UK however has since depressed approvals to under $4B.
UK borrowers will soon face the consequences of these loose standards. By the end of the year, 800K mortgage will be subject to re-set to significantly higher rates. The fixed mortgage average has risen from 3.99% in 2003 to 5.71 by July of 2007. Going forward, the market is left to grapple with the UK’s ability to digest these higher rates. The higher mortgage rates and resets will create major financial obstacles in the UK. One of the main indications of the continued deteriorating housing market is the large value of home equity withdrawals. The chart below shows the relationship between the per quarter value of home equity withdrawals.





According to this chart home equity withdrawals have stayed robust. Though there was a precipitous decline in the metric from 2004-2005, the most recent spike could likely be due to the rebound in home prices. The increasing value of home equities withdrawals suggests that the consumer is becoming overleveraged. Considering the upward trend interest rates, credit for the individual may face unmanageable levels. The growth in income in relationship to HEW argues for a contraction in the UK economy. According to the Bank of England data used in the above graphic, yearly income growth is approaching negative levels. Notice on the graph that in the later portion of the data set declines in income growth correlate with expansions in home equity withdrawals. This in mind, it is arguable that falling income levels forced consumers to borrow on their homes to fund purchases. Looking back to home prices, low income growth coupled with high mortgage rates suggests and affordability problem in addition to an over-leveraged housing market.
These statements in mind, it is unlikely that the BOE will hike at their next meeting. Though money supply growth and inflation do argue for the continuation of the tightening cycle, the BOE will recognize the deflationary pressures and economic stresses extending from the housing market.[/code]
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Today is the Tomorrow you worried about Yesterday!

[Chairman Mao]

So its Merv vs Henry

Who's right? only time will tell


Bank's warning on inflation dampens hopes of rate cuts
Finance ministers warn against panic as markets slide; Darling pledges action to avert recession
By Sean Farrell and Colin Brown
Published: 23 January 2008
Mervyn King warned last night that price pressures could make the Bank of England miss its inflation target more than once this year as he set out a tough stance that will dampen hopes of a series of interest rate cuts.

The Governor of the Bank of England said higher prices for energy, food and imports may force him to write more than one letter of explanation to the Chancellor because inflation had hit 3 per cent – a point above target. The Bank's Governor has only written one such letter – in April last year – since the central bank gained independence in 1997.

Mr King said the next year would pose more challenges than at any time since 1997 as the Bank faces the twin pressures of rising prices and slowing growth. Tighter credit conditions could slow economic activity sharply, while weaker economic activity and falling asset prices might spark another round of losses for banks and a further tightening of credit, he added. But he said the Bank was determined to keep inflation on track to meet the Government's 2 per cent target. Inflation is already marginally above target, with the consumer price index standing at 2.1 per cent in December.

"It is possible that inflation could rise to a level at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor," Mr King said in a speech in Bristol. He added that higher inflation was inevitable, but that the Bank's task was to ensure that the increase was shortlived. "If inflation expectations were to pick up in the wake of a rise in inflation this year, then only a more prolonged slowdown would allow inflation to return to target," he said.

He said it was not the central bank's job to solve the banking crisis and called on lenders to reveal losses promptly and raise new capital if necessary to restore confidence to the system.

Mr King made his speech on the day that the US Federal Reserve cut its benchmark lending rate by three-quarters of a percentage point to try to ward off a recession.

Amid rumours of concerted action by central banks, the Bank of England indicated it had no plan to bring forward the next meeting of its Monetary Policy Committee (MPC), scheduled for 7 February.

European finance ministers warned against panic, and said European economies were better prepared for a slowdown than the US.

The MPC kept rates on hold this month after voting unanimously for a cut in December. Most economists had believed the Bank would cut rates next month in the first of a series of rate reductions this year. Mr King's warning will weaken those expectations.

Alan Clarke, UK economist at BNP Paribas, said core inflation was under control and that the Bank of England was "in denial" about the severity of the economic downturn to come. "It is a matter of time before the Bank of England realises the downside risks to growth and cuts more aggressively. But it is looking more and more like it is not going to be front-loaded in the early part of this year and will have to wait for the second or third quarter."

Ed Balls, an ally of the Prime Minister, said the Bank of England had scope to cut interest rates to keep the economy afloat. "With inflation low and the Bank of England able to cut interest rates as we saw just a couple of months ago, I think we are in a strong position," he said.

Alistair Darling, the Chancellor, told the Cabinet yesterday that the Government would take whatever action was necessary to avoid a recession.

The Prime Minister and the Chancellor faced sharp criticism last month for appearing to put pressure on the Bank to cut rates, with Mr King's reappointment as Governor still undecided. But Downing Street hinted yesterday that Mr King would be confirmed for a second term soon. The Prime Minister's official spokesman said the announcement would be made "shortly", adding: "When Eddie George was appointed for a second term, that announcement was made in the middle of February."

Richard Lambert, director general of the Confederation of British Industry, echoed Mr King's concern about inflation, and warned the Bank of England against aggressive cuts. Mr Lambert, a member of the MPC until spring 2006, said that an over-reaction could damage the central bank's credibility. "There are limits to how much the Bank can cut," Mr Lambert said.

He was speaking at the unveiling of the CBI's latest industrial trends survey, which said that while sentiment fell for the second consecutive quarter, the manufacturing sector prov-ed resilient in the final quarter of 2007. The survey showed that 28 per cent of respondents increased new orders in the three months to January, ahead of the 17 per cent reporting a fall in demand.

[HenryTo]

Thanks, DK. It increasingly looks like that the Bank of England is severely behind the curve.

[dknoester]

Panic selling shuts £2bn fund
· Scottish Equitable acts after slump
· Fears that other funds are at risk

http://www.beearly.com/pdfFiles/Scottish%20Equitable17012008.pdf

DK

[rffrydr]

UK housing defies 3 months downslide:

http://www.ft.com/cms/s/0/26293fbe-bdd0-11dc-8bc9-0000779fd2ac.html
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Gloomy outlook:

http://ftalphaville.ft.com/blog/2008/01/02/9824/ft-survey-finds-worst-uk-outlook-since-dotcom-bust/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

5.7% Debt to GDP Ratio in UK.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

And how it all trickles down to the numbers:


(Citi downgrade of HBOS)

[rffrydr]

Regulation can take several faces:

http://www.ft.com/cms/s/0/d50af192-a441-11dc-a28d-0000779fd2ac.html
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

BOE cuts .25

http://www.bankofengland.co.uk/publications/news/2007/156.htm
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Abbey National PLC, was the third financial company to cancel a bond offering within a week. Poor market conditions were blamed. Allied Irish Bank’s AIB Mortgage Bank pulled a deal yesterday.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The English village: buy it to save it?


http://www.telegraph.co.uk/portal/main.jhtml?view=DETAILS&grid=&xml=/portal/2007/11/18/ftvillage118.xml
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

What is a bank?


http://www.ft.com/cms/s/0/f5000204-8320-11dc-b042-0000779fd2ac.html
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

"Super-subprime." Interest squared in plastic:

http://ftalphaville.ft.com/blog/2007/10/19/8211/britons-paying-mortgages-with-credit-cards-1-million-priceless/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

http://ftalphaville.ft.com/blog/2007/10/16/8114/red-technical-alert-on-global-banks/
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Today is the Tomorrow you worried about Yesterday!