Angry Alice

Foreigners pulling their cash out of the UK

2008-09-21T10:42:00.001-07:00

It is amazing how the main stream media miss the really big financial stories.

Last week, the BoE published data on the external liabilities of UK banks. At the risk of over-simplifying things, this number measures bank deposits of foreigners held here in the UK. What did this number show? Foreigners are pulling out their cash.

UK based banks hold huge amounts of external liabilities. In March 2008, the number peaked at almost ₤8 trillion. That is about 5 times UK GDP. However, between March and June, external liabilities fell by ₤740 billion. That represents about a 9 percent fall. As the chart above illustrates, this is not something that has happened recently.

As external liabilities were falling, UK banks were reducing their assets. In other words, they were selling off their positions in order to finance their withdrawals.

Here is a question - why do you think foreigners are pulling their cash out of the UK?

Credit card write-offs

2008-09-21T10:40:00.000-07:00

In the third quarter of this year, UK banks wrote off ₤875 million worth of credit card debt. During the last five and a half years, about ₤13 billion had to be written off.

Household debt distress has been around for quite a while, yet the Banks kept on lending. The profits from those who paid their credit card debts outweighted the losses from those who didn't.

Jim Cramer and the equity advice from hell

2008-09-21T10:39:00.000-07:00

This is youtube at its best. US stock picker, Jim Cramer, exposed for his dangerous financial advice.

No more savings any more

2008-08-09T01:49:00.000-07:00

UK savings have virtually evaporated. Too much consumption, too much debt and far too much reliance on housing equity.

Stealth tax

2008-08-09T01:47:00.000-07:00

With each passing year, more people are falling into the higher tax band. Currently, almost 4 million tax payers are regarded as high income earners. That is about one taxpayer in eight.

Back in 1990, a little over one million tax payers found themselves paying the higher 40 percent tax rate. Every year since then, the threshold has trapped progressively more taxpayers. Currently, the threshold is set at just £36,000 after personal allowances. It is comfortable wage, but hardly a fortune.

The 40 percent band captured these additional taxpayers during a period of high growth. Today, the economy is slowing, and the treasury will be looking for new sources of revenues. With a little higher inflation, limited increases of the 40 percent threshold provides an ideal way of filling up those tax shortfalls.

Just wait, it will not be long before a majority of taxpayers will be labeled as "high earners".

Iranian inflation hits 26 percent

2008-07-06T03:06:00.000-07:00

Iran are pushing ahead with building a nuclear bomb, but can not keep a lid on inflation.

TEHRAN (AFP) - Iran's inflation rate, which has provoked intense criticism of the government, topped 26 percent in June, according to a central bank statement published in the press on Saturday. "During the Iranian month of Kordad (to June 20) inflation reached 26.4 percent compared with the same month a year ago," according to the statement published in the economic newspaper Sarmayeh.The previous month, annual inflation was running at 25.3 percent.

President Mahmoud Ahmadinejad has been blamed by many economists for directly fuelling the price rises by ploughing huge amounts of cash into the economy to fund local infrastructure projects.

More shocking inflation numbers from the eurozone

2008-06-30T08:32:00.002-07:00

Sooner or later, central banks will have to raise rates. The latest inflation shock comes from the eurozone area - 4 percent and rising.

Yearly inflation in euro nations hit a record 4 percent in June, the EU statistics agency Eurostat said Monday, adding pressure on the European Central Bank to raise borrowing costs even as the economy slows.

ECB officials have signaled they may hike their key interest rate on Thursday from 4 percent to 4.25 percent to try to cool prices — although that would raise costs for home buyers and companies seeking credit, further slowing the economy.

It may also weaken the dollar by encouraging investors to seek higher returns by
placing funds in higher-interest euro currency accounts. That could send oil
prices, which hit a record above $143 per barrel Monday, higher as well.

ECB President Jean-Claude Trichet has insisted that keeping prices
stable is his main task and the bank doesn't face a trade-off against economic
growth or job creation. That way of thinking does not fit this current wave of
inflation, he said last month.

Instead of indicating an overheating economy, inflation — now running at the highest level in 16 years — seems to be acting as a brake on Europe's economy as shoppers steer clear of major purchases.

It is the same everywhere

2008-06-30T08:32:00.001-07:00

It is funny how the headlines are the same all over the world; house prices down, inflation rising, growth slowing and central banks that don't know what to do. There is a sample from Australia.

HOME lending growth has suffered its biggest decline since the 1991 recession
while inflation continues to soar, confronting the Reserve Bank with the dilemma
of a slowing economy and simultaneously rising prices as it meets today to set
interest rates.

Inflation, according to the series, has been at or above 4 per cent for the past five months - and above the Reserve Bank's 2-3 per cent comfort band since September.

It is getting harder to ramp up property

2008-06-29T03:16:00.000-07:00

Barrow on Furness; the times must be getting desperate. Is this the only town in the UK still enjoying the bubble?

Barrow-in-Furness, in prime position on Cumbria's “Energy Coast”, is definitely having a moment. The buzz is coming from its proximity to Sellafield, the transformation of its former industrial port into “the Waterfront”, a £200million marina, business park and housing scheme, and its MP, John Hutton, Secretary of State for Business and Enterprise, who is well-placed to talk the town up.

Now comes the news that BAE Systems, a local employer, has won the contract to build two super aircraft carriers, creating at least 900 jobs. This is a prime example of the unusual regeneration process in “Barrow”. The comeback of the town is not happening through cappuccino bars and “lifestyle” hype, but with hard economic investment. Millions of pounds are being poured into the town; at BAE Systems, for example, a £40million “ship-building hall” will be created.

“Barrow is bucking the trend,” says Stuart Klosinski, industrial development manager at Furness Enterprise, which promotes and supports Barrow businesses. “What we have seen recently is a buoyant housing market affected by large-scale recruitment into the area. As well as BAE Systems and Sellafield up the road, we also have major companies such as Kimberly Clark based here and other firms that require technical, managerial and professional staff.”

Year-on-year, house prices in Barrow have risen 11 per cent, and are now on average £111,588; the national average is £183,626 (Land Registry). Terraced houses have had the most significant price rise at 33 per cent, but over the past year, the volume of sales across all properties has dropped by more than 50 per cent.

CEOs giving up bonuses

2008-06-28T23:37:00.000-07:00

Seems unlikely; but this is what portfolio.com are reporting.

In the wake of losses sustained in the credit crunch, John Mack of Morgan Stanley gave up his 2007 bonus, as did top executives of Bear Stearns and Merrill Lynch. Lately, Lehman Brothers has been the Street's problem child, and Yalman Onaran of Bloomberg News reports that its C.E.O., Richard Fuld, and its president, Herbert (Bart) McDade, told the firm's managing directors this week that they will forgo 2008 bonuses.

The bonus is typically the majority of a Wall Street professional's annual compensation. But these are hard times, with credit markets mired and with deals and offerings chilled. "I'd be surprised if other C.E.O.'s didn't give up their bonuses this year," Jeanne Branthover, the New York-based head of the financial-services practice at Boyden Global Executive Search, told Bloomberg.

Feedling the lie

2008-06-28T23:32:00.000-07:00

The times are again feeding the lie that rents are skyrocketing.

Paragon Mortgages, which as a specialist buy-to-let lender has a huge interest in keeping landlords sweet, says that rents across Britain have risen by an average 11.7% in the past year.

As ever, the villains are the banks. Higher rates and stiffer deposit requirements are preventing tenants from breaking into home ownership, driving more people into renting and trapping those already there.

Letting agencies are apparently crying crocodile tears at queues of homeless couples begging to rent and being gazumped into even higher rents by landlords overwhelmed by demand but eager to help.

And yet an auction at London’s Café Royal last week was reportedly littered with former buy-to-let properties that had been repossessed by banks because the sums no longer added up for the cash-strapped owners.

Can both pictures be accurate? Yes, but they show how fragile the housing market has become. Paragon’s 11.7% rental increase disguises large disparities across the UK. Rents on houses have jumped by a third, while those on flats are, well, flat.

The ONS rental data says otherwise

Bank against bank

2008-06-28T23:26:00.000-07:00

What do Fleck, Fortis, RBS and Barclays have in common? An interesting obsversation from ML-implode; the banks are getting gloomy about banking sector prospects.

"What they have in common is all have recently predicted a massive unraveling of the US financial 'system' within a few weeks. It is not as if this prediction or being on the verge of a meltdown is something new. The financial system has come apart several times in the past year but the Fed has always stepped in with something that has caused the markets to calm down (on the surface) and stocks to rally. Bonds, however, have never responded quite in the manner of stock market participants ..."

Disappointment and understanding

2008-05-13T09:38:00.000-07:00

I just loved this paragraph from last week's press release from the Council of Mortgage lenders:

“We understand the conflict between slowing economic growth and rising inflationary pressures, and the uncertainty over some of the data reflected in the split views of MPC members last month. However, the MPC had an opportunity to act to anticipate the worsening economic environment today, and it is disappointing that there has been no change. "

Despite feigning understanding about inflationary pressures, the CML remain disappointed that the Bank of England didn't cut rates. The worsening economic environment would be made much worse by a cut in interest rates. Inflation is rising extremely fast right now. A cut in interest rates would exacerbate price expectations and lead to further difficulties down the road.

Disappointed! Whatever!

The estate agent bubble is crashing

2008-05-06T08:34:00.000-07:00

The BBC reports:

"About 150 estate agents' branches are now closing every week in the UK, according to research. Business monitor Debtwire said the number of branches had fallen from 13,000 to 12,000 so far this year."

I could never understand how all those estate agents could survive. In London, they popped up like a plague. Every High Street seemed to have four or five. Now that the market nose-diving, it is hardly suprising that it is taking down 150 estate agents a week.

Fat cat rescue

2008-05-04T05:15:00.000-07:00

A cartoon that says it all.

(picked up from housing panic)

Building societies begin to shrink

2008-05-03T00:38:00.000-07:00

Today, the guardian reported:

Mortgage lending by the UK's building societies has slumped by more than £1bn, according to new home-loans data. Building societies advanced net loans of just £580m in March, down from £1.8bn in the same month last year.

The 68% decline means that building societies are scaling back lending as a result of the credit crunch even more severely than major mortgage bank rivals, such as Halifax and Cheltenham & Gloucester.

An unsurprising story; building societies were always more susceptible to the credit crunch since they had a smaller depositor base and a greater dependence on wholesale financing.

For the same reasons, building societies are the weakest link in the UK banking system. Although the BoE have never stated this publicly, the Special Liquidity Scheme was almost certainly designed with them in mind.

Debtland - living upside down in Australia

2008-04-13T07:03:00.000-07:00

Here is an excellent programme on personal debt in Australia. Start at the top and work your way down.

The UK economy

2008-04-04T23:12:00.000-07:00

BTL - the madness continues

2008-04-04T23:10:00.001-07:00

I checked out a buy to let website - Nice Investments - today. I picked up a few quotes.

"New turn key service means high returns no longer demand huge resources."

"Multi-Let Residential: "This solution is uncompromisingly the best in the market for gaining the highest rental yields and equity growth."

"Example: Canada Water 4-bedroom property; Purchase price is £400K; Re-developed to provide 6 bedrooms: Monthly interest mortgage payment c£2K: Rental income c£4K: Property re-valued at £600K, freeing up cash to buy the next property."

Example: 1 Bedroom Flat in SE1: Market Value 205K: Negotiated purchase price 155K: Full re-furbishment and high rental fit out for 15k: Pre development rental £650 pm: Post development rental £1,050 pm: Revaluation after development £210k: Equity gain after 6 weeks of development £47K. Surplus cash funding next portfolio purchase.

Our unique approach enables us to double standard market rental yields.

So if any project in which you participate fails to return a profit by the end of the stated period, nice investment will return your original sum plus a return of 10% per year for the duration of your investment (not compounded).

Single-Let: The focus here is to achieve payback for an investor within months of purchase.

The promises here are extraordinary; high returns without "resources" (presumably this means investments without any down payments); the highest rental yields, equity growth, and a guarantee of a 10 percent return plus original investment.

However, I failed to find a single warning on this website that said that the value of an investment can go down; that leveraging multiplies the risk of loss, and that there is some risk with property speculation. Check the website out, and see if you can do better than me.

The UK housing crash is here

2008-04-04T23:07:00.001-07:00

(click on the chart for a sharper image)

If you want to understand what is happening to house prices, you must look at a chart. Today, the Nationwide produced their monthly survey of house prices. Unfortunately, the media reported this data by producing a battery of misleading percentage growth numbers.

The plan facts are that the Nationwide data shows a substantial nominal price drop since October, when prices peaked. In percentage terms, prices are down almost 4 percent lower than the peak.

If prices continue to fall at the rate we have seen over the last five months, then we are likely to see an 8.7 percent annualized nominal fall in prices.

Assuming that the RPI inflation rate remains at 4 percent a year - a reasonable assumption since it has been at that level for around two years - then in 12 months time, the real value of housing is likely to be about 13 percent lower than today.

The crash is here.

Unbelievable numbers

2008-03-13T11:22:00.000-07:00

The numbers behind Carlyle capital - the hedge fund that is currently on the verge of insolvency - are just incredible.

The fund was started in 2006, but it attracted $670 million in equity.

It used that equity to build up assets amounting to $21.7 billion. It built up these assets by borrowing around $21 billion.

Most of its assets were mortgage-backed securities, primarily AAA-rated bonds guaranteed by Fannie Mae and Freddie Mac. As we have seen,these MBS haven't looked too good recently, what with all those foreclosures in the US.

It was leveraged 32 times, giving it an capital ratio of 3.2 percent of its assets.

According to the WSJ, it has defaulted on about $16.6 billion of its loans, and expects to default on the rest.

The stock has lost around 83% since the company first disclosed its funding problems last week. So the shareholders are pretty much wiped out.

How does this kind of hedge fund ever get past a financial regulator?

UK housing - waiting for a bail out

2008-03-11T08:07:00.000-07:00

The UK housing market frightens everyone. Homeowners fear that prices will fall, wiping out billions of pounds of undeserved home equity gains. Renters fear that prices will not fall, thus locking them out of the opportunity to own a home. Banks are petrified that a housing correction will expose their balance sheets to unbearable losses. Meanwhile, the government is equally terrified. A housing slowdown threatens to push the economy into a recession, reduce tax revenues and generate a banking crisis that can only be resolved with a taxpayer-financed bail out.

How did the UK housing market become such a fearful monster? In my view, the answer is straightforward; our collective misery is the product of a grotesque union between unfettered finance and suffocating state control, which has distorted the UK economy into a mangled mess. Despite its dreadful nature, this desperately malfunctioning market is rarely described in such terms. Instead, demand, supply and above all a shortage of housing are believed to be the primary causes of our housing-induced anxiety.

Let us start by dismissing the notion that there is a housing shortage in the UK. Although rrices are a product of highly regulated supply and credit driven demand, the market "clears" at a price that equates demand with supply. In this sense, there is no "shortage" of housing.

There are, of course, millions of people who would like to buy a house but do not have the resources to purchase one at the prevailing price. There are also other people can buy, but only after taking out mortgages that diverts a huge proportion of their disposable income to debt servicing.

Over the last decade, banks mercilessly worked over this latter group. Banks have made available billions of pounds for mortgages. With a mixture of fear and greed, many first time buyers have signed away a lifetime of income in order to own a home. Today, personal sector debt has reached breathtaking levels. It is now highly doubtful that much of it can be paid back, and for the first time since the 1720 south sea bubble, the UK is on the brink of a systemic financial sector meltdown.

Housing supply is perhaps the most misunderstood part of the market. First, in terms of physical supply of dwellings, the UK has rather a lot of housing. In fact, it currently has around 26 million dwellings. There are around 60 million people living in the UK at the moment, which means that there is one dwelling for approximately every two people.

Furthermore, the number of dwellings is increasing. Back in 1991, there were about 23.5 million homes, so we are up almost 2.5 million homes in about 17 years. Unfortunately, housing construction is also the most regulated activity in the UK. A person may own a piece of land, but she can do nothing with it without the permission of the state. For the last twenty years, the state has used draconian planning procedures to limit the number of new homes to about 200,000 each year. Why it should be so is a mystery, but the quantity restriction is impervious to demographics, income growth or household size.

Recent construction activity has focused on flat conversions or multi-occupancy dwellings. There is a sad irony here. The vast majority of Brits would prefer to live in a house, rather than an apartment. However, people’s true preferences rarely figure in madhouse we call the UK housing market. Planning restrictions creates a nest of perverse incentives that pushes the construction industry into building what the state will permit rather than what people want.

The consequences of this socialistic control of supply and extravagant credit have been appalling. It has generated enormous wealth for older homeowners, while placing a generation of younger homeowners into a lifetime of crippling debt.

The housing market has also distorted the economy. It has promoted the financial sector, and crippled manufacturing. Instead of developing productive capacity, credit has been channeled into financing housing transactions, which has left some people richer than they should be, while leaving others with more debt than they can pay off.

Today, around one worker in five works in the financial sector while just one person in ten works in manufacturing. So far, the UK has got away with this lop-sided economic structure by financing today's consumption with tomorrow's expected income. However, it cannot go on for much longer. People simply cannot absorb any more debt.

It also created a new class of naive property speculators who believe that these distortions can be exploited to generate huge capital gains. In the past, this belief was vindicated. However, the UK housing market is treacherous terrain. The banks, which have driven up demand with easy credit, are now pulling away. Housing prices can not grow infinitely, and a reversal is under way, threatening to impoverish many buy-to-let investors.

The collapse of Northern Rock signaled the end of the credit-financed housing boom. Mortgage approvals are now down by around 40 percent. House prices began falling in July last year. UK banks are experiencing increasing mortgage default rates, while write-offs for unsecured debt have skyrocketed. Unsurprisingly, the first sector to show signs of a slowdown was financial services, while the rest of the economy looks likely to move into recession sometime this year.

Therefore, it is not hard to understand why people are so afraid. While the planning restrictions will survive, it alone will not prevent a dramatic reversal in prices. The unfolding housing market correction threatens to expose all the underlying weaknesses of the UK economy and all that fear will be replaced by pain and loss.

Data sources:

The numbers on house dwellings come from table 101 , which can be found on the misnamed Communities and Local Government website. Employment percentages were calculated using ONS data; LOMA for banking and finance and LOLO for manufacturing.

Clean up our hospitals

2008-02-29T22:17:00.000-08:00

MRSA deaths in the UK
Clostridium difficile deaths in the UK

The complacency about clostridium difficile (c. difficile) and MRSA is nothing short of scandalous. Last year, c. difficile claimed 6,480 lives, while MRSA took lives 1,652.

The reason for this shocking death toll is well understood by everyone; dirty hospitals and the fly-by-night contractors who are supposed to clean them. Every month last year, some 677 people died because of this misguided idea that hospital cleaning could be contracted out.

It is time to end this epidemic. Ward cleaning should be reintegrated back into the mainstream management of hospitals. There should also be a nationwide campaign of re-establishing hygiene standards within the NHS. This will require extensive ward closures but it needs to be done if we are to stop the escalating death toll from these two bugs.

Another piece on Northern Rock

2008-02-18T12:45:00.001-08:00

Darling - in his own words

2008-02-18T12:43:00.000-08:00

.... well, perhaps I exaggerate....

A quick primer on subprime

2008-02-18T11:31:00.000-08:00

Here is a very funny link; check it out....

It is all about the banks.....

2008-02-18T09:46:00.000-08:00

Over the last few weeks, a question has bugged me. Could the sub prime crisis bring down a major US investment bank? The crisis has already destroyed some 220 small financial institutions. It also forced Bank of America to bail out Countrywide, one of America's largest sub prime lenders. But what about a gorilla? Could it take down one of the big beasts roaming the financial jungle?

There are two badly wounded investment banks out there; Citigroup and Merrill Lynch. Out these two, Merrill looks the most vulnerable. In early January, the bank reported the worst quarter in its history, forcing the bank to write off $16 billion due to sub prime investments.

How much of a financial hit is $16 billion to a bank like Merrill? These days, balance sheets are available with a click of the mouse. Merrill started out in 2007 with assets amounting to $841 billion, and liabilities of $802 billion.

Subtracting assets from liabilities gives the bank's capital, which is the loss-making shock absorber. So long as the bank has a sufficiently large stock of capital, the bank can ride calamitous decisions like investing in sub prime assets. Simple arithmetic tells us that at the end of 2006, Merrill had capital amounting to around $39 billion.

The Merrill website has a couple of further, more interesting numbers for capital. During the first quarter, bank capital increased by around $2 billion, to around $41 billion. By the end of 2007, the bank had owned up to the losses. As a consequence, bank capital fell to $32 billion. In simple terms, sub prime investments burned up around 24 percent of Merrill's capital.

Looked from the perspective of bank capital, these losses are mighty. While subprime has not put the bank in any immediate danger of insolvency, neither is the bank in any shape to absorb any further shocks.

So when Bernanke met with the rest of the FOMC on Monday, he almost certainly had Merrill foremost in his mind. With the stock market crashing on monday, he had a vision of a further financial shock ripping through the banking system, zapping bank capital, much like the sub prime crisis did in 2007. He may be worried about a recession, but he is petrified of a major bank sinking into bankruptcy.

There is only one way he can help; reduce rates. This will allow banks like Merrill to increase their spreads between borrowing and lending money. Over time, bank profitability will improve and gradually bank capital will recover.

However, the rate cut comes at a time when inflationary pressure in the US is at a 17 year high. The CPI is now over 4 percent and will almost certainly rise further. After several years of relentless dollar weakness, import prices are rising.

However, when it comes to choice between Merrill or inflation, the Fed knows what to choose. It will be Merrill every time. This leads us to a profound conclusion. Whatever the Fed may say, monetary policy is there to serve Wall Street.

The impossible triangle

2008-02-18T09:45:00.000-08:00

Consider these three headlines; all of them taken from the same edition of the Times:

Mortgage lending hits a new record in 2007
Half a million homeowners miss mortgage payments
Bargain hunters reignite UK housing market

Despite the seeming contradictions in the headlines, taken together the three articles provide an almost complete narrative about today's housing market.

The first article tells us of a bumper year of household debt accumulation "Gross mortgage lending rose to its highest level last year. Figures from the Council of Mortgage Lenders (CML) show that banks lent a total of £362 billion to homeowners last year, up 5 per cent on 2006 and the highest level since records began in 1999."

To be fair, the mood of the article quickly sours when it acknowledges the recent mortgage slowdown: "lending in December was £22.6 billion, down 25 per cent on November and the lowest level in any month since May 2005."

The second article is much more unpleasant; it is about debt despair and desperation. It tells of "almost half a million cash-strapped homeowners" who have "missed a monthly repayment on their mortgage in the past six months." Since there are almost 12 million mortgages in the UK, this means that about 4 percent of borrowers are in deep trouble. Should these repayment difficulties turn into repossessions, then the UK would have financial crisis every bit as bad as the sub-prime crisis over in the US.

So far, the story is clear; too much housing debt pushing far too many households into payment difficulties. But what about the third article? How does that fit into the reality of a rapidly deteriorating property market. Can the housing market really be reigniting?

The third article is about denial. The housing crash may be upon us, but there are still plenty of people ready to drop a quote that distorts reality. The market is not crashing, it is reigniting because "bargain hunters" have appeared to save the day.

It acknowledges that "the average price of a house has fallen for a third month", but despite declining prices "activity is growing as cheap deals draw out buyers ". Miles Shipside, from Rightmove, gleefully informs us: “Some home buyers are now able to find properties that have fallen into their affordability zone, and are bagging what they see as bargains against previous prices."

So there we have it, the three corners of the UK property market triangle; debt accumulation, debtors drowning in debt, and denial that anything is wrong.

Housing affordability - we still have a long way to go

2008-02-18T09:43:00.000-08:00

(click on the chart for a larger image)

The UK house price to earnings ratio has actually fallen marginally in the last months of 2007. House prices are now crashing; they are already down almost 5 percent since July 2007. However, prices will need to fall much further before the price to earnings ratio reaches its long term equilibrium level.

The estate agent window mystery

2008-01-22T08:32:00.000-08:00

For a long time, estate agent windows were incomprehensible to me. Prices simply did not make any sense. How could a grotty terraced house in North London be worth £500,000? Were city high flyers really spending their bonuses on houses that just one short generation ago were occupied by bus drivers and dinner ladies?

More recently, I believe I have developed a better understanding of the estate agent's window. With the virtual disappearance of first time buyers, the UK property market has become a closed community of speculators, trading with each other.

It works something like this: speculator A lists their overvalued slum at the estate agents. Speculator B buys it with a loan from the high street bank, and the estate agent takes his commission. The solicitor gets his cut arranging the transaction, and the Treasury gets the stamp duty.

A short time later, speculator B lists the same property at a higher price and passes it along to Speculator C. So long as the high street bank is prepared to lend out progressively larger mortgages, the cycle continues, with prices accelerating at every stage.

In Britain today, housing ownership is churning around in a stagnant pool of speculators. Each time a property changes hands, the new owner takes on a larger mortgage than the previous owner. At an aggregate level, the level of housing related debt has exploded. Nevertheless, everyone seems comfortable because property values have remained buoyant.

Occasionally, housing speculators turn to people like me and try to explain this debt accumulation cycle. Rather than talk about shoddy lending practices, they explain that there is a terrible housing shortage that pushing prices ever higher. In fact, there is so much pent up demand for housing that prices can only ever go one way.

There were occasions when these housing speculators gave me some advice - "go on girl, get out there and get on the property ladder". Here, I must admit to the occasional moments of weakness that led to some unpleasant trips into the estate agents office. I even looked at some potential properties. However, it was follow-up visits down to the high street bank that put me off home-ownership. As I looked at the 25 year repayment schedule, I just couldn't see the annual holiday, or the regular night out. All I could see was a lifetime of financial sacrifice.

These conversations with the home owning elite, the estate agents and the high street mortgage brokers gave the rise in house prices a dubious plausibility. After all, how can anyone argue against the iron laws of restricted supply and pent-up demand?

For a long time, I have to confess to being taken in by this line of thinking. However, one day I noticed that my rent had remained remarkably stable, despite the surge in house prices. If rents are not going up, then where is the housing shortage?

With the housing shortage justification blown away by my stagnant rent, I started to look to credit growth for the answer. Sure enough, the data told a very simple story; UK credit growth was smooching around the housing market like a teenage boy with his first girlfriend.

It soon became obvious that this bubble depended on excessive credit growth and debt accumulation. The housing shortage was merely a abili for irresponsible banking. Furthermore, it was also obvious that house prices would continue to rise so long as banks extend ever larger loans. It would stop as soon as the credit tap was turned off.

After ten years, it appears that the UK housing market has finally reached this point. UK banks have severely restricted mortgage growth. Credit growth has jilted the housing market. The separation will be painful.

Today, speculator A can no longer sell her overvalued property to speculator B. The estate agent will not receive their commission, and the solicitor will not arrange the sale. As for the Treasury, it will not be receiving its stamp duty.

Speculator A, however, will be carrying a very large debt that the high street bank will expect to be serviced. Initially, speculator A will avoid facing up to the harsh truth that their property can not sell at a price sufficient to pay off the mortgage. She will be left with just two choices; either keep paying the mortgage or default. Both will be painful, but the High Street bank would definitely prefer the former rather than latter option. Some speculators will pay, but way too many will end up defaulting.

As for the future, house prices will fall; the bus drivers and dinner ladies will eventually recover those shabby North London terraces. The city highfliers will again buy houses out in Amersham. As for me, I will be able to pass by one of the few remaining estate agents offices without feeling either confused or angry. Yes, better days will soon be upon us. Normal people will again be able to think about buying a home.

Ten facts you need to know about the UK buy to let market

2008-01-12T10:06:00.000-08:00

As of September 2007, there were 991,000 buy-to-let mortgages outstanding.
In 1998, there were just 28,000 BTL mortgages.
Again, as of September 2007, the total gross outstanding value of BTL mortgages was £116 billion; an amount equivalent to about 8.5 percent of GDP.
In the 12 months up to September 2007, BTL mortgage lending increased by almost £22 billion - an annual growth rate of 17 percent. In terms of additional borrowing, this amount was equivalent to almost 2 percent of GDP.
During the same period, the number of outstanding BTL mortgages increased by 27 percent.
In 2007, the average value of a BTL mortgage was £117,000. In 1999, it was just £73,000.
Northern Rock and Paragon were two of the top five BTL mortgage providers during the first of 2007. At the risk of understatement, both institutions experienced significant financing difficulties during the second half of 2007.
Almost a third - 31 percent - of BTL landlords are over 55.
Around 41 percent of buy-to-let investors are women.
Some 57 percent of BTL landlords are in the business of building assets rather than supplementing income. In other words, it is not about the rent, it is about the capital appreciation.

(Sources: Council of Mortgage Lenders, Citywire)

Government wastes billions on failed IT systems

2008-01-04T14:58:00.000-08:00

Nothing exemplifies the intellectual bankruptcy of New Labour than their misplaced faith in new technology. Here is a shocking story from the Guardian about government wasting billions of taxpayers money on failed IT projects.

"The failure of the multimillion-pound police site marks the latest chapter in the government's litany of botched IT projects, with several costly schemes biting the dust. Blunders overseen by Downing Street have included the much-derided £486m computer upgrade at the Child Support Agency (CSA), which collapsed and forced a £1bn claims write-off, and an adult learning programme that was subjected to extensive fraud.

Top of the ministries for wasting public money is the Department for Work and Pensions, which is responsible for squandering more than £1.6bn by abandoning three major schemes — a new benefit card which was based on outdated technology; the upgrade to the CSA's computer which could not handle 1.2m existing claims; and a £140m streamlined benefit payment system that never worked properly."

Every move you take

2007-12-24T13:04:00.000-08:00

...I'll be watching you.

UK current account deficit ballons

2007-12-20T08:05:00.000-08:00

Failing banks, a mountain of personal sector debt, a crashing housing market, and now a massive current account deficit - the economic problems confronting the UK just keep piling up. All the UK needs now is a recession, and we would have a perfect storm.

During the third quarter of this year, the UK imported £20 billion more than it exported. That shocking number is equivalent to 5.7 per cent of gross domestic product (GDP).

The deficit is the inevitable consequence of the debt-driven consumer expenditure. UK households have borrowed too much and spent the cash on imports.

There is only one way out of this mess. People just have to stop borrowing and start saving. This will lead to a slowdown in growth, but to delay the correction would be to store up even greater problems in the future.

Don't blame ethanol for inflation

2007-12-11T11:56:00.000-08:00

I thought this story was very interesting, especially in the light of the recent increase in world commodity prices.

CHICAGO (Reuters) - U.S. food inflation is rising but don't blame the ethanol-based boom in corn prices, the head of global agriculture and food-industry research firm Informa Economics said on Monday.

Memphis, Tennessee-based Informa, formerly called Sparks Companies, said a study based on 20 years of price data shows that corn prices have minimal impact on the U.S. Consumer Price Index for food, which has been on the rise.

The study, released on Monday, "debunks the concept that the ethanol expansion is the underlying and main significant reason for food price increases," Bruce Scherr, Informa's chief executive, told Reuters in an interview.

"We're not saying that corn prices are cheap, that ethanol hasn't helped underpin the growth in the corn economy," Scherr said. "What we are saying is to blame corn and corn-based ethanol for all of the inflation associated with food and food prices ... is to grossly under-consider all the other forces at work."

The CPI for food, a broadly used gauge for inflation, is up almost 6 percent for the first nine months of 2007, with the food inflation pace at a 25-year high, industry analysts said. Many have blamed the rising price of food on raw commodity prices which have soared to multiyear highs in 2007.

Feeling poor - you are not alone.

2007-12-09T07:46:00.001-08:00

(Click on the chart to enlarge)

Do you feel that your income in real terms has barely changed in recent years? Are you relying increasingly on credit maintain your standard of living. Recent debt and wage data suggest that your experience is far from unique.

Average wages (including bonuses), adjusted for the retail price index have hardly grown in the last fifteen years. Since 1993, the index has gone up just 20 percent. Since the end of 2000, real average wages have increased by just 5.3 percent.

It is a very different story in terms of real household debt (again deflated by the retail price index). Since 1993, real debt is up 135 percent. Since the end of 2000, it has increased by a staggering 69 percent.

UK households have been hiding their stagnant income growth by ever increasing levels of personal debt. Today, household debt stands at almost 100 percent of GDP. It can not go on. It won't go on. We are maxed out on the collective credit card. It is now time to stop borrowing and start repairing our personal balance sheets.

UK banks get the message

2007-12-04T07:59:00.000-08:00

UK commercial banks have finally woken up to the credit card debt crisis. For the last year or so, they have been quietly tightening lending standards. The new regime seems to be working. The stock of outstanding credit card balances is beginning to fall from its peak back in Christmas 2005. Since then, credit card balances have fallen by around 5.9 percent. Nevertheless, the stock of outstanding credit card debt in October 2007 was six times higher than in January 1994.

However, Britain's debt addicted credit junkies have gone elsewhere for their fix. Britain's debtors have moved onto the harder stuff. Unsecured loans and home equity withdrawal facilities have never been more popular. Personal sector debt has kept on rising. It is just isn't being charged to the plastic with the same reckless abandon.

Personal debt - a national affliction

2007-12-03T11:21:00.000-08:00

When it comes to unsecured debt, the British are the champions of Europe. According to Datamonitor, individuals in the UK have an average of £3,175 ($6,223) unsecured debt, more than double that in the rest of western Europe. Furthermor, the UK now accounts for a third of all personal debt on the continent.

Despite these staggering levels of debt, UK banks seem unconcerned about rising levels of personal indebtedness; at least until the credit crunch rolled into town.. In recent years, personal bankruptcy in the UK has rocketed (see chart above). Last year, over a 100,000 people entered into Individual Voluntary Arrangements (IVAs) – the British equivalent of personal bankruptcy, forcing lenders to write of £1.4bn of bad debts.

Meanwhile, the total stock of UK mortgages now stands at over £1 trillion; a figure that has risen by over 24 percent compared to last year. Taking mortgage and unsecured debt together, this means that every man, woman and child in the UK owes an average of £21,000 ($41,660).

This rising stock mortgage debt has not been accompanied by a similarly rapid rise in personal income. Moneyfacts, the financial information company, said that on average mortgage payments account for 24 percent of people's pre-tax salary today. In 1996, just 16.5 percent of households' salaries went on mortgage repayments. The situation for first-time property buyers, is even more desperate. Mortgage debt accounts for nearly 27 percent of first-time buyers' salary compared to 18 percent in 1996.

Incomes have not kept pace with housing prices. Between 1996 and 2006 the average income for first-time buyers has nearly doubled from £17,308 ($33,924) to £34,216 ($67,063) while average house prices have soared from £64,692 ($126,796) to £211,453 ($414,448). During the same period, the ratio of house prices to incomes have risen from 3.7 to above 6. Yet despite increasing signs of a massive and bloated bubble, house price inflation shows no signs of relenting. Last year, house prices increased by a staggering 9 percent.

Given that UK residents pay around 40 percent in personal taxes, many people are paying almost a half of their personal incomes on mortgage costs. In such circumstances, it is perhaps not surprising that people have resorted to personal unsecured debt to finance consumption expenditure. Nor is it surprising that an increasing number of debt soaked homeowners have resorted to personal bankruptcy.

Demographics - the truth

2007-11-25T11:51:00.000-08:00

It is extraordinary what rubbish building societies put out to convince us that the UK bubble will go on forever. Today, the Alliance and Leicester put out a report claiming that increasing life expectancy will keep the market buoyant. "Families will move more often to cope with adult children remaining at home as well as dependent elderly relatives."

The report suggests that "changing demographics and social attitudes will inevitably have an effect on the housing market in the future. For example, the number of times that people move in their lifetime, or the increase or decrease in the type of household they live in. These trends are predicted to change dramatically in the next 20 years.'

The A&L’s Changing UK Household Market report, undertaken in conjunction with the bogus Centre for Future Studies, claims that as the population is living longer, people are "spending more time at certain life stages and living in more houses than ever before."

We are being asked to believe that by 2026, the overall number of households will increase as a result of changes in the make-up of the housing market, with more people living on their own and an increase in lone-parent households as divorce rates continue to rise.

Here is a one-word refutation of this rubbish - pensions. Most UK citizens have made totally inadequate financial provision for retirement. Once the current 50-somethings reach 65, they have little or no income. They will have only two sources of income; a meager state pension and their house. So, by 2026, millions of penniless old codgers will be staggering down to the estate agents hoping to sell their overpriced homes they bought in 2007.

I will give you a second one-word refutation - fertility. UK fertility rates are around 1.6 children per woman, significantly below 2.1 needed stabilize the population. Fertility rates are declining as fewer woman have children and as the population ages. With ten or so years, the UK population will rapidly start to shrink. It would be shrinking today, were it not for record levels of immigration. The demographics implied by current fertility rates points to an unprecedented reduction on housing demand.

So demographics are the death-knell of the housing bubble. Demographics tell us that in the long run, housing is an extremely bad investment. Demographics tells us that in twenty years time, the UK will be one massive old people's home. Demographics tells us that we should sell our houses now, start renting from a buy-to-let idiot and buy cheap in 2015.

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2007-11-24T04:26:00.001-08:00

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