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Buried In The Abbey
Apr. 21st, 2008 01:27 pmSo, Abbey National stops lending to anyone without a 25% deposit. Since a 300k flat (quite standard for two bedrooms in a half-decent area in London) would require you to stump up 75k, plus another 15k or so for expenses, I think that we can safely say that the current market is shot to shit. How steep and horrible the fall will be is anyone's guess, and a lot depends on rollover effects with, for example, remortgagers, and with the knock-on to the whole economy.
In effect, the UK needs to produce itself out of trouble, so, if full employment is maintained, you don't get recession-linked defaults, and the housing market stabilises at a new "more sensible" level, with inflation working to bring house prices back to a p/e ratio of 4 to 4.5 times average annual earnings.
But if we get a dose of unemployment, then you get defaults. People can't remortgage. They get foreclosed. The whole market seizes up. The crash in house prices in areas where most of the purchases were credit-funded could be in the region of 50% (and even I hadn't imagined that in my earlier doom-laden scenarios). London, where more purchases are cash-based and there are fewer first-time buyers, will fare better unless the recession is global. But I can still see a 30% drop in house prices.
One saviour (for London) could be the strong euro. For reasons that escape me, the place is still chic.
But in parts of Bolsover and Newport, where most of the mortgages are 100% and there are no new buyers on the horizon, it makes pretty grim viewing for a number of homeowners, and not that much better for non homeonwers, unless they are sitting on wodges of cash.
One conversation I used to have with people who worried about falling house prices was to ask them "could you afford to buy the place that you are living in today?", to which the answer was invariably "no". "So", I then asked, "who do you expect to buy it, if not another version of you?"
In this sense, the whole housing market was a bit of a Ponzi scheme, with the increased prices hidden by the word "affordability", as if that was all that mattered, the amount of your monthly payment. Hidden away in this emperor's new clothes land was that the debt was real money. a grand a month for 40 years is not cheaper than fifteen hundred a month for 10 years.
The Bank of England wittering about the bailout is clearly trying to hide the fact that it's a bailout. George Osborne follows the nut-line, talking about "unblocking the financial system", while Mervyn King glossed over the cracks by saying that the Banks would be required to pay a fee for the swap facility and they will have to provide the Bank of England with assets "of greater value than the government bonds they will receive".
The key phrase here of course is "of greater value than". What does that mean (apart, of course, from implicitly assuming that the whole thing is a liquidity crisis and nothing else)?
I think the best way to explain this is to remember Schindler's List, when Schindler asks Goeth how much the workers were worth to him. Goeth, clearly an investment banker in a previous life, said that that was not the point. The point was, how much were the workers worth to Schindler.
As Goeth spotted, "value" is a relativistic concept.
Another example might be if I really want a painting that someone else owns. He desperately wants to sell, I (an art expert, for the purpose of this thought experiment) desperately want to buy, and we both agree that the painting is "worth" ten million quid.
Unfortunately, neither I nor anyone else who thinks that the painting is worth ten million quid (all the art experts in the world), have that kind of money. And the people who do have the money (second-hand car dealers in Walthamstow) are only offering a million quid.
We, the art experts, mock this valuation as "way wrong". But, in what sense is it wrong? It's the same with the CDOs. It doesn't matter how many experts say that they are "worth" x-million quid. All that matters is how much a second-hand car dealer in Walthamstow is willing to pay for them.
So, Mervyn King might be talking about value, but it's a nebulous concept and I suspect that King is praying that his assertion is not put to any kind of test in the short term.
____________
In effect, the UK needs to produce itself out of trouble, so, if full employment is maintained, you don't get recession-linked defaults, and the housing market stabilises at a new "more sensible" level, with inflation working to bring house prices back to a p/e ratio of 4 to 4.5 times average annual earnings.
But if we get a dose of unemployment, then you get defaults. People can't remortgage. They get foreclosed. The whole market seizes up. The crash in house prices in areas where most of the purchases were credit-funded could be in the region of 50% (and even I hadn't imagined that in my earlier doom-laden scenarios). London, where more purchases are cash-based and there are fewer first-time buyers, will fare better unless the recession is global. But I can still see a 30% drop in house prices.
One saviour (for London) could be the strong euro. For reasons that escape me, the place is still chic.
But in parts of Bolsover and Newport, where most of the mortgages are 100% and there are no new buyers on the horizon, it makes pretty grim viewing for a number of homeowners, and not that much better for non homeonwers, unless they are sitting on wodges of cash.
One conversation I used to have with people who worried about falling house prices was to ask them "could you afford to buy the place that you are living in today?", to which the answer was invariably "no". "So", I then asked, "who do you expect to buy it, if not another version of you?"
In this sense, the whole housing market was a bit of a Ponzi scheme, with the increased prices hidden by the word "affordability", as if that was all that mattered, the amount of your monthly payment. Hidden away in this emperor's new clothes land was that the debt was real money. a grand a month for 40 years is not cheaper than fifteen hundred a month for 10 years.
The Bank of England wittering about the bailout is clearly trying to hide the fact that it's a bailout. George Osborne follows the nut-line, talking about "unblocking the financial system", while Mervyn King glossed over the cracks by saying that the Banks would be required to pay a fee for the swap facility and they will have to provide the Bank of England with assets "of greater value than the government bonds they will receive".
The key phrase here of course is "of greater value than". What does that mean (apart, of course, from implicitly assuming that the whole thing is a liquidity crisis and nothing else)?
I think the best way to explain this is to remember Schindler's List, when Schindler asks Goeth how much the workers were worth to him. Goeth, clearly an investment banker in a previous life, said that that was not the point. The point was, how much were the workers worth to Schindler.
As Goeth spotted, "value" is a relativistic concept.
Another example might be if I really want a painting that someone else owns. He desperately wants to sell, I (an art expert, for the purpose of this thought experiment) desperately want to buy, and we both agree that the painting is "worth" ten million quid.
Unfortunately, neither I nor anyone else who thinks that the painting is worth ten million quid (all the art experts in the world), have that kind of money. And the people who do have the money (second-hand car dealers in Walthamstow) are only offering a million quid.
We, the art experts, mock this valuation as "way wrong". But, in what sense is it wrong? It's the same with the CDOs. It doesn't matter how many experts say that they are "worth" x-million quid. All that matters is how much a second-hand car dealer in Walthamstow is willing to pay for them.
So, Mervyn King might be talking about value, but it's a nebulous concept and I suspect that King is praying that his assertion is not put to any kind of test in the short term.
____________
