house prices - always and forever upward?

I remember the leadup to Japan in 1989 and it was very much like the present. Britain hasn't had mass home ownership during the turn in a credit cycle before and those assuming that the turn in a credit cycle will be similar to the turn in a housing cycle are almost certainly due for a surprise.

Of course the problem for doomster speculators is that when prices are at their most cheap, credit will be at its most impossible to obtain.

FoFP

BTL is still only a small minority of the market.

De-regulation has provided a large increase in availability of rental properties to meet demand. As for 'correction' it's already happened: look at rental yields. But the building frenzy in city centres is continuing. Mr Bigs are taking big bets

Of course, Mr Bigs sometimes bet the wrong way...

Maybe I've misunderstood you here, are you saying the credit cycle does not impact the housing cycle? My thoughts are that one drives the other.

That is true, which is why a lot of people expecting a HPC are trying to save/invest wisely so they are less dependent on bank credit, when there are bargains to be had.

I don't actually relish the prospect of a HPC, it will be absolute horrendous.

The credit cycle must obviously have effect on the housing cycle solong as one is largely bought using the other. However, there have been housing cycles during the credit cycle and therefore the effects of a turn in the credit cycle cannot be adequately predicted from previous turns in the housing cycle. I don't believe that we've had an instance in the UK of both turning at the same time, unless perhaps we look at the fallout from the South Seas Bubble. Housing at that time could not be said to be a consumer item.

I wonder if there are really very substantial numbers of such people.

Possibly, but it will be very interesting too.I certainly look forward to the more rational view of credit which will prevail in the aftermath.

FoFP

A Very British Subprime Crisis begins?

No. That's just the venal preying on the vulnerable.

Bill

Exactly why reckless borrowing will always be bailed out by the government and central banks, there are too many people in too much debt (including the government).

You're more likely to see hyperinflation than a true bust, or a bust soon followed by the former.

Apart from HSBC, how many of the sub prime lenders are institutions where we are likely to have savings?

In any case, while our savings are pretty much guaranteed by the government, that doesn't mean that the banks themselves will be rescued.

What about the last house price crash? I was fairly young at the time, but didn't Barclays have problems with bad debts around the same time.

Actually, they are not, because I don't want a 5 bed house. I want something smaller, like the place you are suggesting they move in to.

In Vienne south of Lyon the Communist Mayor (who is communist) has passed a law forbidding landlords from ejecting tennant for such trivial things as non payment of rent. Is the result a communist Nirvana? Not at all, there are now few landlords willing to rent properties in his town.

Tennants do need some rights but I would say that the UK provides a fairly dynamic rental market.

Are you saying you can't find anything smaller than a 5-bed house??

I've been following the US subprime markets since 2000. It's the same thing there. There were people sold mortgages who:

• Didn't understand that "2-28" meant low teaser rates for 2 years and then higher rates for 28 years.

• Didn't know that variable rate mortgages meant that the monthly payment could vary and that starting out when base rates were 1% pretty much guaranteed that they would vary upwards.

• Didn't know house prices could fall (they haven't in any year in US history) and so knew that if they got into trouble they could sell the house and avoid foreclosure.

• Didn't know that interest-only mortgages meant that they weren't actually paying for the house.

• Didn't know that negative-amortisation mortgages (you don't even pay all the interest at first) meant that they were guaranteed a payment shock at some point (compounded by the point about 1% base rates above).

• Didn't realise that if the house was foreclosed and sold for less than the value of the mortgage, that if the bank forgave them the rest of the debt, they'd immediately be due the full outstanding amount of tax on the bank's "gift".

• Just put down whatever income they thought would get them the loan, with the agent's encouragement, when told that nobody would check. If they now complain, they're on the hook for fraud.

Now of course one can argue that people buying financial products with borrowed money should either make it their business to understand these things or stay out of the markets, but it's clear that banks who relied on making loans for profit, and who took none of the risks of those loans, simply offloaded them onto easy marks in order to get the business. The fallout will be largely on the folks thus fooled (and to me the estimate of 2.2 million foreclosures is beginning to look too conservative) while most of the people involved in this cynical pyramid scheme will go unpunished.

Someone less cynical than I might be able to convince themselves that our financial crooks are above all this. I can't convince myself of this.

FoFP

It certainly wasn't a turn in the credit cycle, as the amount of lending since has shown. I do remember that Prudential ran into a lot of trouble and had to offload hundreds of estate agencies at a 90% discount to what they paid for them.

First estimate for what happens at the turn of a credit cycle: the price becomes what was the cash down. The credit part largely vanishes.

FoFP

The problem is that with Greenspan and George's continual bailing out of the bubble, we've gone from "Too Big To Fail" to "Too Big To Bail". It's the natural failure mode of such constant moral hazard.

That's what scares me most. Deflations always run their course and are self-limiting (once prices reach the point of what was cash down, then people can afford them again without resort to credit) whereas the history of government attempts to hyperinflate out of the problem show a definite pattern of first currency repudiation, and then political instability.

Hands up who'd rather do an Argentina than a Japan...

FoFP

You've missed the point. The subprime lenders don't usually hold on to the mortgages. They're sold as mortgage-backs into the CDO markets. The SP lenders are in trouble because if the mortgage is fraudulent, or payments fail in the first six months, the CDO holders can pass the tranche back to the SP originators for redemption. The lenders never expected foreclosures (because nobody will be foreclosed if their property price has gone up - they can sell and redeem the mortgage) and largely didn't have capital or reserves to make good the 13% of loans (and climbing) gone bad.

Thus the folks on the hook are first the folks who packaged and insured the mortgage-backs (usually with default swaps). If they go (and Fannie and Freddie already had considerable financial problems) then the originators of the swaps will be in trouble. It's a fair bet that they never expected to pay out on them either and so what's called "counterparty risk" will come into play and the holders of the CDO's will be on the spot. Thanks to the oft-criticised opacity of the derivatives markets, nobody really knows who's holding that paper. It could be our own banks, unit-trusts or pension funds, or perhaps those hedge funds who are reported to be running on 20:1 leverage.

My bet: right down the line, many of the folks playing in this game have little more real understanding of what can go wrong than the poor saps who took out the original mortgages and even those who did believed that property wouldn't fall in price and so largely went with the crowd.

At a percentage and up to a certain amount yes. Then again, a lot of folks understood that South Seas Shares were guaranteed by the government. At some point even governments are unable to underwrite pyramid schemes.

There's the rub. Now what happens if the banks aren't there to keep creating those crazy mortgages?

FoFP

"Andy Pandy" wrote

I think he's saying that he *can*, because those nice "couples with no kids" *aren't* buying those smaller houses that you want them to!

"Andy Pandy" wrote

Have you noticed how those houses with bigger lounges, bigger kitchens, double garages etc all seem to have more bedrooms? So, that "couple with no kids" who want nice living accomodation, are *forced* into having excessive sleeping accomodation. It's not their fault!

Do they?

You've spotted a gap in the market...