A second mortgage credit crunch that will send UK house prices into a new tailspin is looming, economists and credit experts have warned.
The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages.
To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive.
Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."
Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007.
Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014.
Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant ... The contraction will put pressure on house prices."
The £319bn "funding gap" is the difference between the amount the banks hold in retail deposits and the sum they have lent. The gap used to be financed in the wholesale markets, which froze in August 2007. (AtW's comment: that's 2.5 years now, how long can they print money to keep property bubble inflated?) They have been replaced with emergency state schemes.
Illustrating the scale of the crisis, CML data shows that UK lenders raised £130bn in the markets in the 12 months before the crunch but just £11.5bn in the past two years.
Moody's added that the benign environment of low interest rates and "other Government stimulus [which] have helped borrowers" may just have been "transitory".
Rising bad debts would be particularly severe for building societies, which lost £7.6bn of deposits last year. Their credit ratings have also been slashed, effectively barring all but Nationwide, the largest society, from using the wholesale markets.
"Building societies have been the main victims," Moody's said. "Without access to cheaper Government-backed funding, many will find it increasingly difficult to survive."
Societies are in discussions with the Financial Services Authority about creating a new debt instrument to shore up their balance sheets (AtW's comment: oh FFS - shoring up balance sheets should involve disposals of liquid assets and not taking on toxic tulip on balance sheets int he first place, ffs - not creating new bloody debt instruments!). Called mutual ordinary deferred shares (MODS), the debt will not mature and will pay an annual coupon that can be axed to preserve capital in extreme circumstances.
The FSA has not yet approved the instruments.
Source: CyberToryGraph
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There are just 3 scenarios to current situation that got frozen in time thanks to low BoE rates:
1) hyper inflation to screw up everyone
2) realistic drop in overpriced houses - 50%+
3) something in between
#3 clearly isn't working out - such imbalances can't be balanced out nicely, aka "soft landing" that nobody ever seen.
Commercial property values have already dropped big time, supporting consumer house bubble sure saves votes but it keeps the economy still out of balance.
The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages.
To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive.
Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."
Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007.
Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014.
Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant ... The contraction will put pressure on house prices."
The £319bn "funding gap" is the difference between the amount the banks hold in retail deposits and the sum they have lent. The gap used to be financed in the wholesale markets, which froze in August 2007. (AtW's comment: that's 2.5 years now, how long can they print money to keep property bubble inflated?) They have been replaced with emergency state schemes.
Illustrating the scale of the crisis, CML data shows that UK lenders raised £130bn in the markets in the 12 months before the crunch but just £11.5bn in the past two years.
Moody's added that the benign environment of low interest rates and "other Government stimulus [which] have helped borrowers" may just have been "transitory".
Rising bad debts would be particularly severe for building societies, which lost £7.6bn of deposits last year. Their credit ratings have also been slashed, effectively barring all but Nationwide, the largest society, from using the wholesale markets.
"Building societies have been the main victims," Moody's said. "Without access to cheaper Government-backed funding, many will find it increasingly difficult to survive."
Societies are in discussions with the Financial Services Authority about creating a new debt instrument to shore up their balance sheets (AtW's comment: oh FFS - shoring up balance sheets should involve disposals of liquid assets and not taking on toxic tulip on balance sheets int he first place, ffs - not creating new bloody debt instruments!). Called mutual ordinary deferred shares (MODS), the debt will not mature and will pay an annual coupon that can be axed to preserve capital in extreme circumstances.
The FSA has not yet approved the instruments.
Source: CyberToryGraph
--------
There are just 3 scenarios to current situation that got frozen in time thanks to low BoE rates:
1) hyper inflation to screw up everyone
2) realistic drop in overpriced houses - 50%+
3) something in between
#3 clearly isn't working out - such imbalances can't be balanced out nicely, aka "soft landing" that nobody ever seen.
Commercial property values have already dropped big time, supporting consumer house bubble sure saves votes but it keeps the economy still out of balance.
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