Saturday, April 30, 2005

Vicious Cycle Starts In The UK

The credit cycle is unwinding in England. TimesOnline, "The housing slowdown, reflected in a 35% rise in home repossession orders in the first quarter, is also having a big impact."

"Households, sitting on a debt mountain approaching £1,100 billion, appear to have been clearly affected by the hike in base rates. That effect is compounded by the fact that many mortgage deals negotiated when rates were at a 50-year low are now coming up for renewal. Consumers’ disposable income 'has been chipped away' by tax increases and higher mortgage payments."

"The housing slowdown has cut the amount of so-called mortgage-equity withdrawal. It dropped to £6.9 billion in the final quarter of last year, from £16.8 billion a year earlier. "'You don’t need to have a full-scale collapse in the housing market to produce a slowdown in consumer spending,' said Jonathan Loynes, UK economist."

"Dave Taylor says, 'I think that interest rates will have hit 6% by this time next year. I already pay £900 a month on my mortgage. The choice is to cut back or get deeper into debt by borrowing money and that means credit cards.'"

7 Comments:

At 7:14 AM, Anonymous great caesar's ghost said...

Too bad for the Brits. But here in the US, home prices always go up. At least that's what the head of the local realtors association said. And anyway, we've entered into a totally new economic paragidm. Remember?

Are readers in other cities totally baffled by the "loft" phenomenom. Here in the Twin Cities every other condo is a "loft". By which they mean exposed ductwork (which is to the 2000s as Z-brick was to the '70s), windowless bedrooms, cement floors (how industrial) and a $300/square foot pricetag. Oh well, at least in 5-10 years when they fall out of fashion they can be converted to warehouses. At about $5/sq. ft.

 
At 7:41 AM, Anonymous Anonymous said...

I'm getting bubble fatigue from reading and responding to all these articles.

I can't wait for the correction here.

Greespan's speech on Tuesday is going to be mighty interesting. What is going to win out: inflation control or soft economy accomodation. I saw a report yesterday saying that housing was hot and the rest of the economy was soft. Will Greenspan kill housing with rate hikes ?

 
At 8:15 AM, Blogger deb said...

I think that Kohn's speech last week could have been a trial balloon to see how some harsher language on "asset-price anomalies" (nice phrase!) might be received....

"Low interest rates have, in turn, been a major force driving the phenomenal run-up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving. However, whether low interest rates and other fundamental factors can fully explain the current lofty level of housing prices is the subject of substantial debate.

This situation raises some difficult questions. Can the aforementioned spending imbalances and possible asset-price anomalies continue without threatening macroeconomic stability? And if they cannot be sustained, how will they unwind? Will the transition be relatively benign, or will it be a rocky adjustment with deleterious effects on economic growth, inflation, and other factors? And finally, what role will government policies play in influencing the path of adjustment?

READ THAT LINE AGAIN:
"Will the transition be relatively benign, or will it be a rocky adjustment with deleterious effects on economic growth, inflation, and other factors?"

They see the train wreck coming. Tuesday will be interesting.

http://www.federalreserve.gov/boarddocs/speeches/2005/20050422/default.htm

 
At 8:31 AM, Anonymous Anonymous said...

Deb: How about the line in front of that one,

"And if they cannot be sustained, how will they unwind?"

If they cannot be sutained? If?

See, is seems that there is a possibility that these imbalances may continue to infinity and beyond!

 
At 10:40 AM, Anonymous Anonymous said...

The funny thing is that that speech didn't get any airtime with the media.

 
At 11:08 AM, Blogger Ben Jones said...

(that speech didn't get any airtime with the media)

True, and I had it up within minutes. The gut-less media have failed. The bloggersphere will be remembered after the shakeout for pointing out the obvious.

 
At 6:27 PM, Anonymous Anonymous said...

It doesn't get much press but some parts of the UK market, esp the London mid-to-high price market, has been battered already. The averages have been ok due to appreciation in the low end of the London market and the bubble spreading to rural areas.

A friend bought a new construction condo in 2001 or maybe early 2002 and took delivery in the fall of 2003. The price tag was GBP 500k. He put 20% down but basically he had lost that money by the time he took delivery. He is currently renting it with an interest-only loan and losing about GBP 50 a week. (They rent by the week in the UK. Probably for historical reasons but maybe to reduce the sticker shock of say GBP 2750 a month..)

I see some interesting luxury condos near where I live (Falls Church, VA) that are on the market for close to 800k. You take delivery in 2006 or 2007. Watch out! There is a similar building that went up in 2003 that sold for prices around 400k per unit. Someone is trying to sell a unit there for 729k but apparently over-priced since it has been sitting for weeks in a market where houses sell in days. They were trying to rent it for a year at $2500 with no takers. I looked at one for $1950 and it rented with some difficulty.

 

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