Beach Ices at Praa Sands
Ice meeting the sand at the base of the low cliff behind Praa Sands Beach, West Cornwall. 6th January 2009....
Icicles at Trewellard Bottoms
Water seeping through a wall is turned to icicles, ate Trewellard Bottoms, where Geevor Mine meets the sea....
Winter Sunset at Levant
A late afternoon scene, at Levant Mine, West Cornwall. 7th January 2009....
Winter at Levant
The old electricity generator building, at Levant Mine, West Cornwall, during the recent cold snap. 7th Jnauary 2009....
Banks told to predict effects of a 40% crash in house prices
By Patrick Hosking, Banking and Finance Editor
BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.
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The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.
He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.
“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.
A few banks were “weak in all respects” in stress-testing.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
Yes - bring it on...but think of the poor sods who have just scraped together enough to buy somewhere only to see the price of their property drop by 40% so they're paying interest on 40% more borrowings than they need have.
Exactly! It's all very well saying bring it on but what about the thousands of people who are struggling to pay their mortgage. I realise it's tough to get on the housing market. I'm fortunate to actually be able to buy a house in Cornwall where I was born. Still, we've had to scrap together everything we've got just to get a roof over our heads. So to be honest, a 40% crash would be a disaster for me!
House prices have risen 300% in 10 years and are now 40% above historical average prices.
People have been brainwashed by media property porn and chepa credit into thinking that this is sustainable and that house prices only ever go up. If you look back 15 years you will find this is not the case.
At present the UK doesn't really make anything - the economy is helped by cheap immigrant labour and the spending binge home owners have been on using equity withdrawn from their homes. Is this healthy?
A 30 year £150,000 = 30 years of virtual slavery
I rent a £300,000 house for substantially less than the interest only mortgage payments would be, but without the risk of negative equity
I'm afraid at the end of the day where your sympathies lie depend on where your interests lie. From my perspective the writing has been on the wall for a few years and I am still astounded people are extending themselves and house prices are going up.
Either you beleive this time it's different and the housing market is not in fact a market - i.e. not driven by supply, demand, greed, fear and most importantly economic cycles. Or you beleive that what goes up must come down.
You choose, but think about it and do your research before you invest the next 30 years of your life
The fact that the banks etc are now introducing longer term mortgages even up to 50 years in some cases and also mortgage loans of greater than the traditional 3.5 times earnings means that buyers are drying up. If you are the last person in line to buy something with increased prices along that line then you are lumbered with something which noone else will buy at a higher price. Prices must then fall. And when they fall, it then does so in a protracted downward spiral with people then not wanting to buy because they believe that if they wait then they will be able to buy at a cheaper price in a few months or a year etc etc etc. I hope I make sense. I think the principle is quite simple really. Correct me if I am wrong.
It will I am sure end in tears for many and I daren't think about what will happen to the economy when that happens.
It's telling that all the Labour MPs are trying to become Deputy PM and not Chancellor. One title has significantly more prestige and no one wants it. Anyone would think that the economic future of Britain isn't as great as they'd like you to believe.
House price inflation IS the UK economy. If houses stop going up in value then the merry-go-round of borrowing and spending to prop up the economy will stop dead - a little like what might be happening in the US.
In case you doubt it: Manufacturing employment rates have reached their lowest levels since 1841, new figures have revealed.
http://www.personneltoday.com/Articles/2006/11/16/38190/manufacturing-employment-hits-lowest-rates-since-1800s.html
There are a lot of people talking about the US going into recession around the middle of next year. I believe that some of the opposition parties believe that Brown will call a snap election once he becomes leader. I wonder if he's in a hurry for some known reason to himself. I believe the UK usually follows the US in terms of boom and busts except for the one earlier on this decade where a recession was averted this side of the atlantic due to Brown's spending. The problem is, he won't be able to do it again (or rather his successor) as the government is up to it's neck in debt.
I am not sure if I am too much a pessimist or what but I see a very bleak future. I live in west Wales and most of the industries have either gone abroad eg textiles to North Africa or other companies to Eastern Europe. Dairy farming is in the doldrums and every other person seems to be employed in the building trade. Worrying times.
Here is a good site detailing the housing situation in the U.S. Many believe that the 'states will be the first global domino to fall, we are sure to soon follow. This won't just be some piddly recession either - we are talking about a '30's style full blown depression here - food queues, mass bankruptcies, massive job losses etc etc... and just when the oil supplies start running short! One will feed into the other, there is no way out, it is inevitable.
On the bright side, it may well be quite possible (due to the global nature of, not just a housing crash but a total collapse of all economies globally), that most, if not all mortgage companies will go bust with no chance of any government bailout. If you still have a (real) job and have a supply of food, you can just sit it out.
Don't forget to keep an eye here also:
UK - http://www.housepricecrash.co.uk/
Global - http://www.globalhousepricecrash.com/
Be sure to come to hear Ricahrd Heinberg at St John's Hall PZ on Friday - there is some extra capacity and a few places left (some extra seats and some standing room). The coming house price crash and Peak Oil are intimately related and Richard will explain why, and what we can do about it.
'The UK's rampant house price inflation is likely to slow down dramatically in the next year or two, according to a former government economic adviser.'
<snip>
and this 'former government advisor' doesn't even factor in prospective energy shortages - but what would you expect from a cretinous economist?
Here's another one - and not a single mention of Peak Oil anywhere.
AA
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Nov 21, 2006
Hard US lessons, harder landings
http://www.atimes.com/atimes/Global_Economy/HK21Dj02.html
The arriving Democrats in the US Congress are likely to plan little and execute on even less in the way of seismic economic adjustment. Thus it is of interest to forecast their response to the trouble that is coming.
The US is beginning to unwind the largest housing bubble in modern history. There will be upswings and local exceptions and wide regional and price variations. This changes nothing. Hundreds of billions of dollars in household access to cash and debt from refinancing, equity extraction, home equity lines of credit and house flipping will dry up.
Housing price crashes differ from equity price busts in three important dimensions. First, the price corrections during housing price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes last about four years, about one-and-a-half years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices.
The implied probability of a housing price boom being followed by a bust is about 40%. Housing and equity price busts have,however, one important feature in common. During the 1970s to the 1990s, they generally coincided or overlapped with recessions. [1] The housing market today is in the early stages of a multi-year correction.
This will constitute a radical reduction in the wealth effect, access to credit, low-cost credit and notions of improving conditions for the long-suffering American middle class. The revolt of these folks in the November mid-term election is just the first in a series of cuts that their reaction to worsening conditions will carve into the national economy and polity. Middle class reaction to deteriorating economic conditions will be definitive next year and beyond.
The debt, income and savings situation of the American middle - if we take the three middle quintiles of the income distribution to be the middle class - is horrifying. Many of these people are in the difficult situation of simply waiting to discover themselves and be discovered as former members of the middle class in terms of material quality of life. 2006 will be a year where America's aggregate savings rate is negative.
Households are simply not saving anything. Real average weekly earnings of production and non-supervisory workers - over 75% of all us payrolls - have been stagnant since the mid 1970s. If we use 2005 dollars and the CPI-U (consumer price index for urban consumers), average weekly earnings decreased by about $1 per week over the 30-year interval 1975-2005. The folks have thus stopped saving and have taken on massive amounts of housing and consumer debt.
A look through the Federal Reserve's Flow of Funds Accounts of the United States, or Z1, released in September 19, is a traumatic experience. It reveals the contours of America's debt disaster in stark statistics that grow worse with each passing quarter. In 1999, total outstanding household debt was $6.4 trillion. As of the end of the second quarter of 2006 total outstanding household debt was $12.3 trillion.
Household debt has increased by almost as much since 1999 as the sum total of all debt accumulated by all households across the preceding 220-year history of the US. In 1999, household mortgage debt stood at $4.4 trillion. At the close of the second quarter of 2006 it had more than doubled to $9.33trillion. In 1999, consumer credit outstanding was measured at $1.6 trillion.
Today, this stands at approximately $2.4 trillion dollars, signaling a 50% increase in less than seven years. This is usually soft peddled and talked down by comparison to skyrocketing housing values. Household assets held as real estate increased by $9 trillion from 2000-2006. This might be called the mother of all modern bubbles. Yet household net worth struggled up by a mere $1.2 trillion. Net worth badly lags housing values because of waves of cashing out. When these waves crash ashore it will be with massive destructive force.
The last six years have hosted the most stupendous extraction of inflated household wealth in history. Across the 22 quarters from 2000 through the second quarter of 2006 disposable personal income increased by $2.3 trillion. However, disposable personal income as a percentage of household net worth fell. Rising house values contributed more than personal income increases largely derived from these rising house values.
Owner's equity as a percentage of household real estate declined despite soaring prices from 58% to 54%. Another way to describe the above two statistics would be that American households are totally dependent on inflating house prices and have already borrowed and spent the paper gains that every credible economic model suggests are now deflating.
Last year this process of refinancing took on a desperate air. Mean house prices are now falling. Interest rates are above recent lows and unlikely to test them absent a serious recession. However, Americans keep refinancing and re-mortgaging. Why? There really is only one answer: desperation. Freddie Mac informs all those who dare to look that 90% of its refinanced loans resulted in new balances at least 5% higher than the previous loan.
This means that the third quarter of 2006 was the highest rate of cashing-out refinancing in 16 years. The median age of a refinanced loan was 3.4 years. If you look at rates in the spring/summer of 2003 - when these now refinanced away loans were written - you will note that they hit a 40-year low. Refinancing continues despite falling house prices and rising rates. This is the desperate top of a very troubled bubble.
In the third quarter of 2006, the median ratio of new-to-old interest rates was 1.12. In other words, one-half of those borrowers who paid off their original loan and took out a new one increased their mortgage coupon rate by 12%, or roughly three-eighths of a percentage point at today's level of fixed mortgage rates. This is the highest ratio since Freddie Mac began compiling this information in 1985. [2]
It is clear that legions of folks are desperately continuing to pursue survival strategies that built them mountains of debt and no longer make any sense at all. We know there is trouble coming from the housing quarter and we can be certain it is significant and will take at least a few years to work through. This will put tremendous pressure on Americans stuck with flat earnings, high debt, deflating house values and zero savings. What offsets can we count on?
The traditional routes of savings reduction, debt increase and government counter-cyclical spending and tax cuts have already been over-utilized. These options either don't exist or will have to be used modestly and to reduced effect. As we have already reviewed, there are no savings or the false savings some economists claim come from rising house prices.
The sustainability of present debt stretches credulity. This calls into question who still would be willing to loan to earnings-strapped, debt-burdened Americans with deflating collateral and home equity. Last but not least, can Uncle Sam save the day? No!
The Federal government has gone on a tax cut and spending bender that almost puts the American consumer in a thrifty light. The Federal Reserve Z1 Report of September 19 - mentioned above - offers a handy little table called Consolidated Statement for Federal, State and Local Governments or L106c. Between 2001 and 2006, all assets of all levels of government grew by 16% to $2.4 trillion.
During the same period, liabilities grew by $2.6 trillion, or 40%, to $7.9 trillion. Thus, the state has in fact already been firing on all cylinders - native and borrowed - to force up growth and economic activity level. There is real trouble coming as tax increases and spending cuts in some combination are required to slow the growth of Federal debt and foreign borrowing ahead of falling tax receipts and rising payments associated with underfunded liabilities from Federal programs. Thus, the government is more likely to prove hindrance than help in the near-term future.
The shape and speed of the coming troubles, and mass reaction to them, are likely to be the largest shapers of domestic macro economic performance. We believe there are also significant international implications. Housing is the next shoe to drop and the first sign of the upset that was the mid-term elections.
Notes
[1] IMF World Economic Outlook April 2003. Chapter II, When Bubbles Burst, page 63.
[2] Refinance Activity Remains High; Cash Out Share Increases in Third Quarter. November 1, 2006, Freddie Mac.
Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst and managing director of GlobalMacroScope.
Rise in county's road death toll
The number of people who have died on Cornwall's roads rises in the last year to 35, police say.
Film con man ordered to pay 100K
The man who swindled almost 2m in a film studio scam is ordered to forfeit 100,000 by a judge.
Triplets survive against the odds
A woman from Cornwall who gave birth to triplets 14 weeks early describes their survival as a "miracle".
Call for inquiry into fire centre
Fire chiefs demand a public inquiry into the delayed opening of the regional fire control centre.
Prison sentence for benefit cheat
A man who admitted swindling more than 51,000 in benefits over a six-year period is jailed for 18 months.
Divers face trial over shipwreck
Three Cornish divers accused of plundering a shipwreck off the coast of Spain are to be tried in a Spanish court.
NO TO NUCLEAR WASTE IN CORNWALL - MPs
Proposals to bring nuclear waste to Cornwall have been described as absurd and irresponsible by Cornish MPs.
Route Partnership Plan for Penzance unnecessary
Their plan having been rejected by the public in the final exhibition in Septmber with 90% against the Route Partnership have decided to try again in mid January after a mailout and poster campaign.The Chamber of Commerce has been at the forefront of this campaign.
