Foreigners pulling their cash out of the UK

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?

Disappointment and understanding

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

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.

Building societies begin to shrink

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.

The estate agent window mystery

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

1. As of September 2007, there were 991,000 buy-to-let mortgages outstanding.
2. In 1998, there were just 28,000 BTL mortgages.
3. 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.
4. 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.
5. During the same period, the number of outstanding BTL mortgages increased by 27 percent.
6. In 2007, the average value of a BTL mortgage was £117,000. In 1999, it was just £73,000.
7. 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.
8. Almost a third - 31 percent - of BTL landlords are over 55.
9. Around 41 percent of buy-to-let investors are women.
10. 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)

UK current account deficit ballons

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.

Feeling poor - you are not alone.

(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.