SUB-PRIME slime, the American-spawned menace that has shaken banking giants
and rocked share and bond markets, has invaded our shores.
The extent of the threat that this fearsome creature could pose to our housing
market has yet to become clear, although some early effects are already
being felt. These include more expensive mortgages for some homebuyers but
cheaper deals for others. This is yet another example of the unpredictable
nature of the sub-prime affair that began with the campaign mounted by some
US banks to peddle mortgages to down-on-their-luck “sub-prime” borrowers who
often had negligible ability to meet these commitments. Most were in the
“Ninja” (no income, no job or assets) category.
Amid the uncertainty – even Hank Paulson, the US Treasury Secretary, has this
week conceded that there will be no “quick fix” to the situation – one thing
is sure. Now is the time for everyone with a property investment to watch
the action and tune into the mood in all other markets. As a homeowner, it
is tempting to think local, concentrating on the direction of prices in your
neighbourhood. However, the sub-prime affair, which started in dirt-poor
districts of Florida and Nevada but could yet spread to the squares of
Belgravia, illustrates the interconnection between all markets and the need
to think global.
One immediate consequence of the upheaval in share and bond markets worldwide
is the decreased likelihood of another bank base rate rise next month. Simon
Rubinsohn, the chief economist at the Royal Institution of Chartered
Surveyors (RICS), notes that this has led to a fall in money market “swap”
rates that determine the level of fixed-rate loan offers. Some lenders are
already cutting the price of their fixed rate loans – good news for the
creditworthy.
But another repercussion of the sub-prime affair may be misery for the
would-be homebuyer with past debt problems, resolved to henceforth tread the
path of repayment righteousness. If this borrower surmounts the new
obstacles and actually succeeds in obtaining a loan, the rate he pays will
be high. Banks are being much less open-handed as the result of the damage
done to their balance sheets by their – arguably reckless – willingness to
buy sub-prime loans that were repackaged and sold on as apparently solid
investments.
Sub-prime slime may seem to be oozing everywhere, leaving a toxic trail
wherever it goes, but it cannot be blamed for the cooling in the mood of our
housing market. This was already under way before the tumult began.
Moreover, despite events in the financial markets, the UK economy remains
strong and employment is high, factors that should ensure that a slowdown
cannot turn into something more serious.
For the moment, the smarter streets of Central London appear almost unpeturbed
by the consternation. David Forbes, of Savills, reports that people have
been bidding blind for £15 million£20 million properties, based merely on
floor plans. He notes that buyers possessed of such resources, mostly
moneyed international types, view the sub-prime affair not as an economic
crisis but as a smaller financial one.
Elsewhere in the capital, however, asking prices are starting to slip,
according to Right-move.com, the property portal. Meanwhile, declining share
prices and fewer takeover bids are set to trim the bonuses to be awarded
later this year to City and Canary Wharf executives who have been some of
the most enthusiastic purchasers of real estate. Ed Stansfield, of Capital
Economics, does not think that we will see destitute investment bankers on
the streets “rattling tin cups”, but if their spending power was curtailed
this would put a dampener on prices in London and the South East.
While events in the sub-prime affair continue to unfold, the average British
homeowner will probably feel aggrieved that his situation may be affected by
the negligent lending practices of US banks that preyed on the vulnerable,
while the watchdogs turned a blind eye. It may not be of much comfort, but
American homeowners feel much more let down, as a trawl through such blogs
as patrick.net/housing/crash.html
and thehousingbubbleblog.com reveals.
HIP HYPE
Opponents of the home information pack (Hip) scheme argued that buyers would
not place much reliance on data supplied by the owner of a property. They
can now say that this belief was justified, although it appears that it is
banks, including HSBC, who suspect sellers could suppress the truth. If the
Hip provider, rather than a solicitor, has obtained the local authority
searches that are a vital component of the pack, then the lender will not be
satisfied. The buyer of the property must then foot the bill for
commissioning new searches. Hips, if you remember, were intended to
streamline the housebuying process and create a new eco-consciousness. This
claim will also appear entirely unreliable, unless the Government acts soon
to sort out the confusion.
It will spread everywhere,no one will escape.If you've got money and can afford to live,you will be OK,if you have been relying on credit to live,you'll have problems.
stephen hulton, eure, france
HIPS are a total waste of time. The search has to be up to date or it does not count. if I put a house on the market it may not sell for some time so I have to buy 2 HIPS. These are amateur documents and I would not pay any credence to document searches done by the buyer. I always do my own searches as the normal ones tend to be casual and i am used to checking far more carefully and watching the local planning activities.
Its just another tax!
David Chalmers Brown, Bracknell, BERKS
The definition of a bubble market is one which has broken its relationship with economic realities. The economic reality we have been witness to in recent years is one in which lenders fall over each other to grab our business. It can be argued that the global property boom has been driven primarily by investor demand for mortgaged backed securities, not property itself. Property has in fact been the vehicle used to create the debt sought after by investors. If credit rating agencies no longer want to be in bed with securitization conduits, then the demand for these assets will fade.
The problem, however, is that our elevated house prices will now exist in a new economic reality. A reality in which the average house price is nearly ten times the average wage. It will soon become clear that high house prices are not a function of supply and demand after all, but a symptom of over subscribed debt, a function of the ease to which credit can be obtained.
dom, Devon,
Dear timesonline/culture,
I just wanted to Thank Rod Little for his wonderful article on "The Only Ones" afew weeks ago. It made my week and I was able to get tickets to see the best band in the world (except for The Who and there are only half of them now). So Thankyou Mr Liddle.
Then to overwhelming joy there was an article by The Only Ones guitarists" John Perry afew weeks later (19/08)...as Mr Liddle mentioned he certainly is literate and I have happily spent the week finding the solo suggested by Mr Perry. As Rod Liddle says"Can we have some more, please" of John Perry's writing style, its nearly as good as his playing.
maria mccormack, Wembley, Middlesex
The definition of a bubble market is one which has broken its relationship with economic realities. The economic reality we have been witness to in recent years is one in which lenders have been falling over themselves for our business. It can be argued that the global property boom has been driven primarily by investor demand for mortgaged backed securities, not property itself. Property has in fact been the vehicle used to create the debt sought after. If credit rating agencies no longer want to be in bed with securitization conduits, then the demand for these assets from large institutions will fade.
The problem, however, is that our elevated house prices will now exist in a new economic reality. A reality in which the average house price is nearly ten times the average wage. It will soon become clear that high house prices are not a function of supply and demand but a symptom of over subscribed debt, and a function of the ease to which credit can be obtained.
dom, Devon,
It is delightful that all this journalistic hyperbole is totally inaccurate and emotional.
The facts - The subprime market is less about 13% of a $14 Trillion (with a capital "T") dollar asset base. Of that $2.1 trillion subprime loan portfoilo, $27 billion (with a little b) is suspect. 87% of subprime borrowers are making their mortgages.
8/31/07 41 states were reporting up to a 1% foreclosure rate....now this is NOT the execution of a notice to foreclose but filing a letter to demand payment of a delinquent loan or else. 70% of these notices are worked out before they cost the owner the home. Often there are two notices per home as their is a first AND second mortgage. Nine states had an up to 1.5% foreclosure notice rate but none more than. Statistically insignificant numbers but for the unfortunate who is about to lose a home.
While this was happening American homeownership increased 3%. Florida and Nevada are hardly slums a la Coronation St. Please accuracy, We expect better.
Andrew Waite, Phoenix, AZ USA
dollar is a trorist money & euro is a tourist money
dollar is fiat money & euro is backed money
tom put, ankara, turkey
The house buying process shoudn't be any more complicated
than buying a car, anyone should be able to do it. Why can't
a house have the same amount o documentation or the
equivalent of a log book and mot in one.................................
The pointless paper chase is just there to keep middle
england happy, and now even there's more of it.
M walker, worcs, worcs
What hasn't been mentioned in is the fact that over the next 18 months up to 2 million fixed rate mortgages are due to reset. How many of these mortgages are sub-prime?
These borrowers will find that their repayments will jump not only due to 5 increases in interest rates in the last year but also higher interest rates due to sub-prime problem in the us and they will also find that there will be far fewer sub-prime mortgages on the market.
The US has seen house price falls with high employment and a booming economy.Could we be seeing a preview of what is about to happen here?
Ian, Reigate, Surrey
The definition of a bubble market is one which has broken its relationship with economic realities. The economic reality we have be witness to in recent years is one in which lenders have been falling over each other to get our business. It can be argued that the global property boom has been driven primarily by investor demand for mortgaged backed securities, not property itself. Property has in fact been the vehicle used to create the debt sought after. If credit rating agencies no longer want to be bed partners with securitization conduits, then the demand for these assets from large institutions will fade.
The problem, however, is that our elevated house prices will now exist in a new economic reality. A reality in which the average house price is nearly ten times the average wage. It will soon become clear that high house prices are not a function of supply and demand but a symptom of over subscribed debt, a function of the ease to which credit can be obtained.
dom, Devon,
New loans made by HBOS (the largest UK mortgage lender) have an average LTV of only 60%. Their existing mortgage book has an LTV of only 40%. The UK residential sector has an LTV of around 25% (the comparable figure figure for the US is around 35%).
I think you need to ask more questions yourself Colm. Maybe not so much leaverage as you thought ? Spot on with regard to the journos though.
Chris Quin, Haslemere, Surrey
There is this constant smug self-congratulatory, can't happen here, smirk in UK stories about the US sub-prime meltdown, which consistently misses the point.
The main features of US subprime mortgages that are the source of problems are:
(a) high loan to value ratio, i.e., 90% or more
(b) high loan to income ratio -- i.e., worse than 4-to-1
(c) floating interest rates (80-90% of US home loans are fixed rate for the life of the loan)
(d) they are not owner occupier loans (e.g., they are buy-to-lets, often with a occupier covenant conveniently badly written by the originating bank (e.g. "Borrower will live in the property" [when, how long for]
(e) borrower's income is frequently self-certified
These loans were mostly made over the last two and a half years.
Do items (a) to (e) look familiar to anyone in the UK - they should - a much larger proportion of UK mortgages have some or all of these features than US ones. So frankly, smug UK financial journalists need to ask harder question
Colm MacKernan, London/Washington,