Thursday, November 1, 2007

Just In Case You Thought The US Was The Only Country With a Housing Problem

It is good to be reminded that we are not the only country with a housing collapse problem. The question that should be asked is what happens in the housing markets in Europe collapse along with the one in the US. Is this a double whammy for the lending institutions. How will the central banks bail us out of that one? Also as you read through this it reminds me of the famous Yogi Berra quote “déjà vu all over again”. Text in bold is my emphasis. From Bloomberg:

Northern Rock, which cratered after investors balked at buying its debt, is one of several signs that the U.K.'s property boom may be ending. The average home almost tripled in value in the past decade, helping fuel the country's 15-year economic expansion -- the longest in two centuries -- and buoying the governments of Tony Blair and Gordon Brown.

Now, with mortgage lending cooling and house prices falling for the first time this year in September, the economy may be in the early stages of a slowdown.

``U.K. house prices are significantly overvalued and extremely vulnerable to a correction,'' said Danny Gabay, a former Bank of England economist and a director of London-based Fathom Financial Consulting Ltd. ``The downside risks to economic growth over the next 12 months are significant.''

The U.K. economy had been the envy of Europe, outpacing Germany and France almost every quarter from 2001 through 2005. Germany surged past the U.K. last year, and for 2008, Europe's largest economies are forecast to run in a pack. The U.K. will probably grow 2.3 percent next year, while Germany and France will each expand 2.0 percent, the International Monetary Fund said on Oct. 17.

Britain's expansion has been spurred by a borrowing spree, thanks to interest rates at 40-year lows from 2001 to 2006. By the end of 2006, the British owed 1.37 trillion pounds, or 1.61 times their income -- the highest rate in the Group of Seven nations, according to the London-based National Institute of Economic and Social Research. By June 30, the ratio had grown to 1.66. The U.S. rate remained at 1.42 during that period.

Britons poured the borrowed money into housing -- and then used their new homes as collateral to take on even more debt. Residential property prices soared 189 percent in the past 10 years, almost twice the increase for single-family homes in the U.S., according to HBOS Plc, the U.K.'s biggest mortgage lender, and U.S. government figures.

Consumers have spent some of these gains and loans on goods such as new kitchens and cars they otherwise couldn't afford, said Alan Clarke, a London-based economist for BNP Paribas SA, France's biggest bank.

``The only thing that has been supporting consumer spending growth is wealth gains from house price inflation,'' Clarke says. ``This is about to disappear.''

Lehman Brothers Holdings Inc. economists in London predicted in 2005 that the surge in housing prices would begin to sputter that year. The housing deflation may have just begun.

In September, banks approved the fewest mortgages in 26 months. The decline came after the Bank of England raised its benchmark lending rate to a six-year high of 5.75 percent in July.

The average cost of a home fell 0.6 percent in September after growing at an average monthly rate of 0.89 percent in 2007, according to HBOS. Banks foreclosed on 14,000 properties in the first half of the year, the highest number since 1999.

David Miles, Morgan Stanley's chief U.K. economist in London, says shocks to confidence like the run on Newcastle, England-based Northern Rock may cause house prices to fall further.

``Optimism about rising house prices has been an important driver of value in the U.K.,'' Miles says. ``Those expectations are potentially quite volatile and can turn round.''

Each month, economists and property investors sift through seven monthly reports on house prices in Britain. Those reports have yet to paint a clear picture of which way prices are headed.
According to Hometrack Ltd., which surveys 6,000 real estate agents, the average cost of a home in England and Wales dropped 0.1 percent to 176,100 pounds in October. That was the first decline in values in two years.

Nationwide Building Society, Britain's biggest customer- owned lender, said today house prices rose in October at the fastest pace in four months because of a shortage of properties.

``The stock of unsold homes is still relatively low and this is providing some residual support to prices,'' Fionnuala Earley, chief economist at Nationwide, said in a statement. Still, ``most leading indicators of housing market activity are continuing to weaken.''

Declining bonuses in the city's financial services industry will reduce the amount of money invested in property in the next year, according to real estate broker Savills Plc. About 6,500 bankers and fund managers may lose their jobs next year in the biggest cuts since 2000, and payouts may fall by 16 percent to 7.4 billion pounds, the London-based Centre for Economic and Business Research Ltd. estimated this month.

U.K. house-price growth will slow next year to 1 percent from 7 percent in 2007, according to the Council of Mortgage Lenders, which represents British home-loan providers.

Northern Rock more than doubled its share of the mortgage market to 7.6 percent in the first half of 2007 from 3.2 percent in 1999 by selling more than 70 billion pounds of mortgage-backed bonds and lending the proceeds. Its strategy failed in September, when demand for the bonds evaporated after the collapse of the U.S. subprime market.

``Lenders were nervous about the extent to which Northern Rock had fueled the housing market upsurge,'' Gabay says. ``Northern Rock may be the trigger that turns sentiment negative on the housing market.''

J.C. Flowers & Co. LLC, a New York-based buyout firm, said Oct. 26 that it's in talks to buy Northern Rock after the Bank of England bailed out the lender in September. Richard Branson's Virgin Group Ltd. and Wilbur Ross's WL Ross & Co. have also said they may join other investors to take control of it.

Gabay says so-called buy-to-let properties, which investors acquire for rental income, are more vulnerable to a fall in prices. The value of new buy-to-let mortgages soared more than 12-fold from 1999 to 2006 to 38.4 billion pounds, or 11 percent of new property loans, according to the Council of Mortgage Lenders.

As interest rates rise, buy-to-let investors are making less profit on rental property, which may drive down housing demand and prices.

``The question is, Does that happen on a minor scale or does it happen on a significant scale?'' Miles says.

The demise of Britain's housing boom, long rumored, may finally be here. And as the Americans learned, when housing catches cold, the whole economy can get the shivers.

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