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Taking the Strain
Jul. 21st, 2008 01:15 pmOnly 8% of investors took up the HBoS rights issue. The Barclays effort was met with a roughly similar derisory response. Barclays put a nice spin on it. "We are delighted to welcome our new investor", it said. I wonder if that is what they will be feeling when the Qatar Investment Authority asks for a place on the board. Surely it would have been nicer just to have the old boys club together? Certainly I suspect Barclays will be more cautious when it comes to dealings with Israel. Perhaps that's where Israel has gone wrong. It's asking for money from the US, rather than going round buying up the world's banks.
Unfortunately, the old boys are not clubbing together to invest in the banks, and the risk now is that those who underwrite the schemes might charge more for the privilege of so doing. After all, when UK banks' recent track records are 0 for 2, it seems reasonable to say that the likelihood of stock being left on the underwriter's desk is considerably more than zero.
And so we return to the question that the bright sparks here were raising last December -- when will the nadir be reached? Here there appears to be some divergence, with Americans showing earlier signs of optimism than we naturally despondent Brits. Part of the reason for the optimism, of course, is that the Americans stick far less to the principles of capitalism when the shit hits the fan than do the British 'Labour' Government. If you are an American, it's quite comforting to know that the Fed is sitting there willing to bail out any financial institution that matters.
That might not do Washington Mutual much good, but it will certainly keep the financial infrastructure ticking over.
In the UK, things are less pretty.
That said, I don't think that the depths of pessimism have been reached, not even in the US. There's plenty more bad news to come if the problem is systemic (which it is). And it's one thing for the Fed to appear to have a guarantee for the two FMs in place, but the situation will be less cheeful when that guarantee is called upon to the tune of $50bn or so a quarter.
++++++++
I was thinking to myself today "well, how overvalued is UK housing?" Using various patented Birks techniques, (mainly, what people will pay in rent compared with what they would currently have to pay as an interest only mortgage) I came up with a figure of around 25% to break-even, to 30% for a reasonable return on capital. If you assume that there will be an overshoot correction, that would imply a 35% drop in real prices over, say, seven to eight years (taking the last bear housing market as precedent). If we see inflation averaging 4% over that same period (personally I think 5% to 6% would be a fairer guess) then that would indicate house prices will be exactly where they were last December in eight years' time, in nominal terms. Rent, rising in line with inflation, would have gone up by 35%, thus restoring the real investment value of buy-to-let.
The really big question, thoough, is when will liquidity return to the UK housing market? Because there are two factors at work here. The first is that people hold off voluntary selling if they can't get what they think their house is worth. This irrationality (because the house that they want to buy cannot be bought, because those sellers too won't sell for less than they think their house is worth) only gets cured when enough forced sales (which are, what, 20% of all sales?) go through to establish new market prices. Gradually people come to terms with a new lower price level, and liquidity resumes.
But there is also factor two, the fact that there isn't the capital around any more. It's all very well the seller saying "oh, ok, I'll take 200K rather than the 250k I could have got two years ago. I give up", but the buyer still needs to find the 200K. If this is all in the "moving around" stakes (rather than the new buyer stakes) you might say "well, where's the problem, he just retires the old mortgage and transfers it over?" But the thing is, there are mortgagors out there who are deliberately shrinking their books (Northern Rock, for one). So you might get the farcical hypothetical situation where a person with a 200k mortgage (obtained when the house was bought for 250k) owns a house that has a willing 200K buyer, and has also found another ex-250k house that is now for sale at 200k, but he still can't move, because he can't swap the 200k mortgage that he had on the old house for a new 200k mortgage on the new house.
In other words, it isn't just a matter of getting buyers and sellers to accept the new lower price levels (a struggle in itself); it's also a matter of getting sufficient liquidity into the lending market to make housing mobility feasible.
The bad thing about this is that it could lead to a frozen housing market, one where pricing is remarkably difficult, because all of the old rules have been torn up. That has rather dire implications for the UK economy, because it freezes mobility of labour as well as mobility of capital. Since labour is a form of capital, it's logical in a twisted form of way that a credit crunch (which is really a freezing of the shifting of capital moving around because of fear, after an unknown amount of it has disappeared) also becomes a labour mobility crunch.
On the plus side, I doubt that the liquidity crisis (most easily measured by the spread between LIBOR and "official" rates) is going to last much beyond early next year. Greed overcomes fear very fast in the banking system. However, there may by then be considerably fewer banks around. Santander, the buyer of A&L, is already looking to shift capital from insurance to banking (by selling its insurance interests and using the freed-up capital to buy distressed banks at firesale prices) because it reckons to return on equity will be better in banking. So, if banks are willing to lend the money (filling the gaps left by Northern Rock and other "shrinkers" like Bradford & Bingley) it's only a matter of changing the public frame of mind and getting the system back into line with fundamentals. Which is where I came in.
___________
Unfortunately, the old boys are not clubbing together to invest in the banks, and the risk now is that those who underwrite the schemes might charge more for the privilege of so doing. After all, when UK banks' recent track records are 0 for 2, it seems reasonable to say that the likelihood of stock being left on the underwriter's desk is considerably more than zero.
And so we return to the question that the bright sparks here were raising last December -- when will the nadir be reached? Here there appears to be some divergence, with Americans showing earlier signs of optimism than we naturally despondent Brits. Part of the reason for the optimism, of course, is that the Americans stick far less to the principles of capitalism when the shit hits the fan than do the British 'Labour' Government. If you are an American, it's quite comforting to know that the Fed is sitting there willing to bail out any financial institution that matters.
That might not do Washington Mutual much good, but it will certainly keep the financial infrastructure ticking over.
In the UK, things are less pretty.
That said, I don't think that the depths of pessimism have been reached, not even in the US. There's plenty more bad news to come if the problem is systemic (which it is). And it's one thing for the Fed to appear to have a guarantee for the two FMs in place, but the situation will be less cheeful when that guarantee is called upon to the tune of $50bn or so a quarter.
++++++++
I was thinking to myself today "well, how overvalued is UK housing?" Using various patented Birks techniques, (mainly, what people will pay in rent compared with what they would currently have to pay as an interest only mortgage) I came up with a figure of around 25% to break-even, to 30% for a reasonable return on capital. If you assume that there will be an overshoot correction, that would imply a 35% drop in real prices over, say, seven to eight years (taking the last bear housing market as precedent). If we see inflation averaging 4% over that same period (personally I think 5% to 6% would be a fairer guess) then that would indicate house prices will be exactly where they were last December in eight years' time, in nominal terms. Rent, rising in line with inflation, would have gone up by 35%, thus restoring the real investment value of buy-to-let.
The really big question, thoough, is when will liquidity return to the UK housing market? Because there are two factors at work here. The first is that people hold off voluntary selling if they can't get what they think their house is worth. This irrationality (because the house that they want to buy cannot be bought, because those sellers too won't sell for less than they think their house is worth) only gets cured when enough forced sales (which are, what, 20% of all sales?) go through to establish new market prices. Gradually people come to terms with a new lower price level, and liquidity resumes.
But there is also factor two, the fact that there isn't the capital around any more. It's all very well the seller saying "oh, ok, I'll take 200K rather than the 250k I could have got two years ago. I give up", but the buyer still needs to find the 200K. If this is all in the "moving around" stakes (rather than the new buyer stakes) you might say "well, where's the problem, he just retires the old mortgage and transfers it over?" But the thing is, there are mortgagors out there who are deliberately shrinking their books (Northern Rock, for one). So you might get the farcical hypothetical situation where a person with a 200k mortgage (obtained when the house was bought for 250k) owns a house that has a willing 200K buyer, and has also found another ex-250k house that is now for sale at 200k, but he still can't move, because he can't swap the 200k mortgage that he had on the old house for a new 200k mortgage on the new house.
In other words, it isn't just a matter of getting buyers and sellers to accept the new lower price levels (a struggle in itself); it's also a matter of getting sufficient liquidity into the lending market to make housing mobility feasible.
The bad thing about this is that it could lead to a frozen housing market, one where pricing is remarkably difficult, because all of the old rules have been torn up. That has rather dire implications for the UK economy, because it freezes mobility of labour as well as mobility of capital. Since labour is a form of capital, it's logical in a twisted form of way that a credit crunch (which is really a freezing of the shifting of capital moving around because of fear, after an unknown amount of it has disappeared) also becomes a labour mobility crunch.
On the plus side, I doubt that the liquidity crisis (most easily measured by the spread between LIBOR and "official" rates) is going to last much beyond early next year. Greed overcomes fear very fast in the banking system. However, there may by then be considerably fewer banks around. Santander, the buyer of A&L, is already looking to shift capital from insurance to banking (by selling its insurance interests and using the freed-up capital to buy distressed banks at firesale prices) because it reckons to return on equity will be better in banking. So, if banks are willing to lend the money (filling the gaps left by Northern Rock and other "shrinkers" like Bradford & Bingley) it's only a matter of changing the public frame of mind and getting the system back into line with fundamentals. Which is where I came in.
___________
