Meralti

There is some interesting facts about the special liquidity scheme in an article that this one links to. You can read it here Borrowing costs will go up In a nutshell; the withdrawal of the special liquidity scheme means borrowing cost are going to continue rising regardless of what the BoE does with base rates. I remember mentioning this a while ago. I've quote from the article to save you having to read the whole thing.

Not sure we've has our jump yet. I think that it was postponed, and when it comes it will be quick. Agree with the China crash scenario. The crack-up boom is happening there not in the west. Yes, I remember this. They got that wrong and they same sort of voices are wrong about China now. That said, the prosperty gap between them and the west will continue to close. Possibly by us getting poorer. Is that the the new bull scenario? Unless you're long cash (more accuately a surviving hard currency).

Your last point seems to contradict all your other ones and many of your previous posts. A period of high inflation followed by a second deflationary crash is a distinct possibility. However, should this happen it will pretty much wipe out all those people who rush into property as a protection against inflation now.

There is no inevitable rise in wages. In fact they are unlikely to match inflation. The current situation is not like the 1970s, as you stated in an earlier post. The inflation we are seeing in the UK is not about you or your mate hiking your rates or buying a butty in yer launch hour. It is about the Brics countries closing the gap in wages and prosperity between them and the west. This means that wages in the west will not increase at anything like the rate that they are doing in the Brics - therefore wages rises, such as they are, will not match inflation. This will lead to a reduction of expendable income for western workers. There is an article in Citywire today stating that prices will fall. It has a nice graph of house prices to average earnings. The average long term price-to-earning ration is 3.7. The current ration for the UK 5.3. This means that UK wages must rise by over 50% in order for the long term price-to-earning ration to be restored at the current average house price. Anyone expecting to recieve that either works for a bank or lives in cloud cuckoo land. Before you say it. I know that the long term average is an abstract concept and there is no law that states it must be maintained at a value of exactly 3.7. However, neither is it an infinitely elastic thing. At the moment it indicate how out of kilter prices are; and the idea that earnings place an upper limit on how far prices can rise is obvious. If wages do not rise then prices must come down. Or a combination of both. I expect to see very small, below inflation wages rises and significant HP falls.

You might be living in the last bastion of the HPI madness - it also sounds, after all these years, as if you've been infected. I not saying that what you're saying is wrong just that the people you describe are living on borrowed time. In the rest of the country HPs aren't rising. Prices are either drifting down or stock isn't being sold. How long can the situation you described continue? Will it survive the cuts, unemployment, widespread reductions in subsidies and interest rate rises? To quote Ken Clark: The circumstances from which the people you describe have benefited are going to change and change a lot. Perhaps your Island will remain protected but I doubt it.

An excellent post Wise Bear. I'm in a similar position to the poster that prompted your response. I would follow you advice to be letter but find that I have already done so. I'm also sceptical of the hyper-inflation scenario - as you ably demonstrate it destroys much of the assets of the very people and organisations who are trying to keep this show on road. Something that is often overlooked is that the very forces and policies that are pushing up the price of PMs are same as those that were designed to supporting high house prices in the UK (and other countries). Should their effect run out of stream and start to fail in achieving their objective, which I think they are; then the reason to continue to follow that route will be gone -- rates will rise (as they alrady are on domestic loans). As you state commodities will suffer under this scenario.

Yes, the hard numbers are: Halifax mortgage approvals where 39,905 for January - 17.4% down on the same month last year and 6.2% down on December.

The NSA came in at -0.02% -- a tiny fall. I estimate the averaging the two indexes as Bubb does will give a fall of around 0.5% So no change in the trend there then. However there were less than 40,000 transactions from January -- which is a pretty small sample size compared to what it used to be, as discussed in this post

Today the land registry are reporting that house prices in England and Wales fell 0.2 percent in December, leaving the YoY figure at 1.5%. as reported on yahoo The revisions to previous months are interesting. The fall from September to December was 1.7%. or -0.425% a month, close to crash cruise speed. This is somewhat more than previously reported. In real terms both Landreg and Haliwide are back to the levels of May 2003, which looks significant as this level has been reached by both indices at pretty much the same time. Considering the interest rate rises occurring in the mortgage market we should expect the steady decline to continue. Mr King of the BoE has already publicly admitted that incomes have fallen back to 2005 levels, so in real terms the house prices falls are greater than the fall in incomes. Grant Shapps, minister for housing, stated that he wanted to see HPI at a level that is a little under that of the standand-of-living inflation - which is what we're seeing, albeit through the mechanism of falls in both.

Hometrack reports continued falls in UK prices and demand as reported on yahoo

One of the largest contributors to the -05 GDP figures released yesterday was construction at -3.3% in Q4 2010.

Some interesting facts coming to light. This also matches well with other reports on another thread. Firstly, mortgage lending is reported as reaching a 9 low and interest rate expected to raise. As reported here by the BBC. Interesting that the BBC has reported bearishly on property recently. As the mouth piece of the UK government this is a total reversal from a few months ago. Also, considering recent posts regarding the media priming the UK public for rate rises we now see that mortgage lenders are unilaterally rising rates in response to rising swap rates. link Also rents are now being reported as falling. rents fall for first time in 11 months Boom in rental inflation 'coming to an end'

It is your view that is distorted. Base rates are too low and rising cost push inflation is now becoming a real risk in the UK. Rising rates a bit and allowing the pound to strengthen would suppress inflation. A strengthened pound (but not too much) would make imports cheaper - it is cost push inflation that we're seeing after all. We should be looking at this question in terms of political interference in the credit/debit cycle with the aim of making electoral gains. When an administration of any hue is elected, it is in it's interest to initially adopt a policy of contraction in order to reduce inflation and gain a reputation for economic competence (or even prudence - remember that). It then adopts an expansionary policy in the lead up to a subsequent election, hoping to achieve simultaneously low inflation and unemployment by election day. This is what Brown attempted and actually had considerable success - labour rose from the low 20s to 33% of the vote. Commensurate tightening after the huge expansion Brown and the BoE unleashed is necessary - rates will rise, its only a question a when. The people are being actively primed for it. I watched John Redwood discussing the necessity of this only yesterday on Newsnight.

Has anyone thought about what this really means? What sort of loans does this apply to? Sounds like BTL and developer loans secured against property (what else). I would speculate that these are non-performing loans from which the bank in question has accepted it can never make money over the long term. For a BTL loan this would imply that the achievable rents cannot cover the mortgage costs. These are very likely to be interest only loans which will no longer be able to serviced by rental payments alone should interest rates rise (even 1/4 or 1/2 a percent). Should the bank repo then the value of the loan will not be recoverable through sale of the property at current market valuations. Also, I would suspect something similar for developer loans -- the sale repo property won't cover the loan value. The banks mentioned are therefore prepared to take a (limited) write-down in order to get these loans of their books. It also implies that no other lender will touch these loans (for remortgage purposes) at there stated value. In order words no one believes that the collateral is worth the loan value. This simply means that those banks involved are implicitly accepting a 25% fall in the value of the collateral (property) from the time the loan was made. Which looks very bearish to me.

Unfortunately for you and your argument the base rate does not necessarily determine mortgage rates. And it is these that determine the cost of the credit that flows into the UK property market. Swap rates are rising regardless of an ultra low base rate, and this is having a knock effect on mortgage rates for new lending. You may remender that the correlation between swap rates and the base rate was also broken after the Lehman crisis, although I can't recall exactly when. See the following article So. you see that the cost new lending, which is what will ultimately drive the market, is under considerable upward pressure. When new lending is squeezed then this must put downward pressure on prices. Although you don't state it, I think what you mean is that existing mortgage holders on tracker mortgages must, and will be protected at all costs. I disagree. ZIRP served to prevent mass defaults when the financial crisis hit. Continuing it depends on what proportion of the banks total loan book consists of these kind of mortgages. When this proportion falls to a low enough percentage and the bank have enough capital to withstand the commensurate losses, it will be safe to raise rates and let some debtors sink underwater. People should be preparing for this event. Anyway, the rates on new loans is rising.

This is also reported on This is Money.

The extremely complacent scenario you describe along with the social shift to neo feudalism (property haves verses have-nots) you mentioned in earlier posts requires IRs to stay where they are for at least 5 years (and that is not just base rates but domestic mortgage rates too). Also required is a sustained economic recovery that allows wage inflation to match core inflation and the creation of a significant number of non public sector jobs. However, five years of weak, sub-trend growth, rising employment and high energy and commodity price inflation along with a banking sector that remains crippled in terms of funding itself at non-punitive rates simply will not deliver this. High inflation without commensurate wage inflation will not enable further debt creation, in fact it will result in the exact opposite. There is an almost complete mismatch between what governments and central banks want the cost of credit to be (this is what you seem to believe it really is, btw) and what banks have to pay to raise the funds to grant new loans. Debtors have a big shock in store. Either that or, as I've previously mentioned, they must be subsidised, at steadily increasing levels -- for ever -- and at the cost of the productive economy.

Further credit tightening look inevitable as the requirement imposed on banks during the bailout to lend at 'affordable' rates fall away. See telegraph article These requirements were really set up to support prices. Letting them lapse is an example of a passive policy shift: where nothing is actively done, but non-the-less will result in a significant change in the mortgage market. This an example of what I was talking about here. This means that the rates charged for domestic mortgages are likely to rise regardless of the BoE base rate.

More bearish data has been released, this time from Rics; as reported by the Press association Perhaps we should expect fall to increase if would be sellers decide to put the their properties on the market next year.

Interesting indeed. Rightmove, usually one of the most bullish indices, has recorded a record 6.2% fall in asking prices over the last 2 months. 3.2% fall in November 3.0 fall in December. YoY is still 0.5% though. So still positive, but only just. See report here. Given the recent downward move in asking prices I'd say it was a false indicator. The Acadametrics index is based on the Land Registry data so lagging around 4.5 months so the shift downwards probably isn't showing up in data yet.

Just read a new article in Money Week. This raises the question: will rising bond yields cause base rates to rise as well? This will be very bearish for property prices.

Bearish data has just been released by the council of mortgage lenders. Some interesting highlights: FTB Volume down 19% YoY FTB Value down 17% YoY The average loan-to-value for house movers 69% an increase from 67% in September The average income multiple was 2.84, down from 2.89 in September."

I agree with most of the above, but I think that you have excluded a third option for the government. That is to, as you say, pull the pins out; only slowly and maybe not all of them, thereby controlling the both the rate and amount of falls. This could possibly avoid an outright crash. Electorially the collation do have something to loose from an uncontrolled fall in prices. The real test is whether or not they are prepared to raise rates, as you said earlier low rates are the biggest "pin" supporting prices. Even a small rise will be enough to push prices down quite a lot; but they won't do it unless they are sure that the banks are sufficiently capitalised to be able to withstand the losses. On one level it makes sense for them to raise rates a little bit early on, while they are still in control of the process, rather than waiting for the bond markets to force it on them. Do they have the balls for this? If rates do not rise I think prices will continue to fall by a few percent a year but not spectacularly. It just doesn't make sense for an owner to sell for a loss when the cost of servicing a mortgage are so low. but this will all change very quickly if a rate rise is forced. The question remains, will the government continue the initiative they started of gradually removing (changes to housing benefit) the props? If so, how far will they go down this road?

That is pretty much it. Vendors simply do not have to sell, therefore buyers who can do and feel forced into it, stump up the money. This can only continue as long as interest rates remain this low for existing property owners. I don't see this continuing all that much longer. Sovereign states are increasingly competing for funds; with each other, with banks who need to roll over debt and corporations. The bond market must surely respond with demands for higher yields. The only thing that can slow this is more QE, the effectiveness of which will continue to diminish. QE must eventually lead to higher long-term interest rates anyway. IMO higher interest rates will happen sooner rather than later. When this finally occurs the banks will not suffer that much because they have already been given the last two year to reduced their exposure, and have been doing just that. The larger UK banks are becoming well capitalised again and they will be able to withstand significant falls in house prices. We have already transitioned from the phase that occurred in late 2007/early 2008 where all actions we aimed at saving the financial system. The banks have survived and many prospered. Looking ahead I believe it is necessary to prepare for an environment with significantly higher interest rates. If unemployment also increases then large HP falls are in store. I now firmly believe that we are on the cusp of a serious second leg down. The government could act, as Brown and Darling did, and throw everything at it a second time. Over the next few months, as house prices continue to drift down we should be asking ourselves the following questions: 1. What can the government do to prevent the second down leg? 2. What are they doing now, or have already done to prevent it? Unless the answers to these two questions are broadly the same then the government is not genuinely acting to support prices and the falls will increase.

A great chart from Money Week showing UK house prices and net mortgage lending. Source. HP and Net Lending Chart Net mortgage lending is as analogous to the rate at which air is being pumped into a vastly overinflated balloon. If the air is flowing out at a greater rate than it is being pumped in then it deflates. Another chart from Money Week show HPI almost touching zero. HPI Chart