The crisis in Britain’s property market must surely now take centre stage as the artificial recovery based solely upon printed money is seen by the majority to be the complete illusion it always was. Back in September 2008, when it should have been obvious that some kind of cure had to be found, I posted the following posts on consecutive days, which may still be read in full from the links at the foot of each quotation.
What value maturing mortgages
A "Professor" whose name I twice missed, but one time member of the Bank of England’s Monetary Committee was doing the rounds of the 24 hour TV news channel last week stating that mortgages were worth their face value on maturity. It was clear from the interview with the clearly demented Prime Minister Gordon Brown on Friday on Sky News, that it is this mistaken view that is now driving the British nation into ever deeper bankruptcy. Let me explain. 1) If I am a supposed homeowner with a mortgage of eighty per cent of previous values I have a 20 percent share of that price. If prices fall by 10 percent I still have an equity share of 10 per cent and will therefore continue with my mortgage payments in the expectation of future house price rises and a desire not to lose that 10 per cent stake. 2) If I am a supposed homeowner with a mortgage of ninety per cent of previous values I have a 10 per cent share of that price. If prices fall by 20 per cent I have negative equity of 10 per cent and if prices are forecast to continue to fall I have zero incentive to continue the mortgage payments on a property over-valued by 10 per cent. As prices fall and re-possessions mount there will be a growing stock of unoccupied housing exposed to squatters and/or a tumbling rental market causing more foreclosures in the buy to let sector further exacerbating the problem. Hence the panic in the property industry to hide the true depth of the collapse. A mortgage maturing in 20 odd years at face value with inflation above 5 per cent is worth very little on present day values. A mortgage maturing several years in the future in a high inflation environment with no interest payments being made is on a discounted cash flow basis effectively worthless. The losses must lie with the mortgage lenders who made the loans on their assessments of present and future property prices, they can hardly now expect the borrowers to bear the full brunt of their ‘professional’ errors, if they do (as seems to be the case at present) then they are likely to be mistaken in my view. That is why the Halifax will now likely end by bringing down Lloyds TSB. Where Britain and Brown (if still in post) go from there is anybody’s guess!
Labels: Credit crunch
posted by Martin at 8:33 AM
Curing Britain’s Property Price Crash.
In my post of yesterday, immediately beneath this posting, I addressed the problem of the householder in negative equity – particularly in my example number 2, of a family with a mortgage in excess of the value of his home but not yet in default – a potential ‘walkaway mortgagee’ as separate from one in default and given notice of re-possession. In my view it is the potential ‘walkaway’ who must first be helped. A decision to quit one’s home is grave indeed and places that family in a position of effectively turning their back on the system. It is therefore an action that the government must endeavour to discourage even at great cost. (Re-possessions follow from a considered action of the mortgage holder and form a separate problem). Nobody yet knows how far UK property prices will plunge but it is essential to be aware that a fall of 20 per cent from peak levels requires a rising property market of 2 per cent above inflation for a period of twelve years before the original peak value is once again achieved. That is far too long to expect an ordinary mortgage holder to maintain mortgage payments for zero return. Once ‘walkaways’ begin they will spread like a plague with all kinds of consequences such as cross-squatting which will make counter-measures practically impossible – effectively anarchy could be an end result. Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase ‘moved the Goal Posts and excluded house prices from the CPI’ any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.
Labels: UK House price crash
posted by Martin at 9:29 AM
The Irish Times, this Monday, reports that its government, having rejected the idea floated for ‘debt forgiveness’ as recently reported on my blog, is now considering a separate agency to handle these matters, read here. This item makes essential reading in the UK, as it covers all the points and arguments raised for and against ‘debt forgiveness’, ‘nationalized banks’ etc., and just where the responsibility for many of the recent excesses should eventually be properly placed. All these delicate considerations should now be up for urgent discussion and consideration in the UK. The likely toppling factor of multiple ‘buy to let’ property holders with interest only loans, likely soon to face bankruptcy and portfolio liquidation, when (not if) interest rates begin to rise, was also discussed in the Irish context on Ironies Too, last week.
This is NOT a problem our Ministers can push off onto, and thereafter blame, the EU!