Co-Ed Naked Call Writing

[DrSpike]

Oh it will (and is - I'm sure you saw the Halifax takeover story). Lending is right down, repossessions increasing - all bad signs.

I think what underlies my gut feeling on this is that here in the UK there has been something of a debate in recent years about whether the housing market is really overvalued. And (unlike in the US context) the 'it might be but not by much' brigade have just about made the stronger case - mostly this comes down to basic factors like growing population, wage growth & strong planning restrictions around new construction.

This leaves most of the risk of crash around liquidity issues, which obviously can cause crashes even with strong fundamentals. A long enough period of high interest rates (because of food/energy say) and a trigger (like bad news from the US) may well just about do it in the current climate. But it's going to take more I think.

And you guys are over the worst, right?

[DanS]

According to the assumptions baked into JP Morgan's takeover of WaMu, we are about 2/3rds of the way through to a 25% reduction, assuming that we have only a shallow recession.

I have no confidence that this will be only a shallow recession.

[Aeson]

Is the UK income:housing cost ratio higher or lower than the US?

[pchang]

US and UK

are not directly comparable. UK has no tax deduction for mortgage interest.

[Kidlicious]

Re: US and UK

Originally posted by pchang
are not directly comparable. UK has no tax deduction for mortgage interest.

I don't think that makes a huge difference since mortgage interest is just an itemised deduction.

[OneFootInTheGrave]

Originally posted by Aeson
Is the UK income:housing cost ratio higher or lower than the US?

was average house price 1:6 average income

since the market fell by between 5-12% already it is correcting, but I am suprised how DrSpike still expects us to escape downright crash?

Sales down 50% year on year, prices down between 5-12%, ~ 20% deposit required for any mortgage now.... year ago 100% mortgages were common... no crash??? I am waiting, perhaps if 700bn of US money props us up so credits become very loose again, but I doubt it... it is wayyy out of historical proportions and it needs 50+% cut from the top prices in real terms to come back to something resembling normality...

[pchang]

mortage deduction makes a big difference

I believe historical house price:income ratios in the US were around 4:1, while in the UK it was around 3:1.

If UK is really at 6:1, then I think DrSpike is way too optimistic about the UK.

[DrSpike]

It's not, and never has been.

But in any case it is overly simplistic to focus solely on price/earnings and price/income ratios. Yeah they are higher today than in the past, but there are perfectly sound economic reasons behind the bulk of the increases, like supply constraints and the pattern of long term interest rates compared to short term rates. Speculative buying probably is a factor too of course, but not as much as iis usually made out.

Critically, mortgage payments/earnings are still below historical levels, and the vast majority of home owners have a significant equity cushion from rises of the last few years. Even with a 20% fall in house prices something it's only something like 75,000 homeowners face negative equity.

As I said above - a crash remains a possible outcome, and the chance probably is at the highest it's been for over 20 years. But we're not there yet.

[DanS]

Bradford & Bingley experiences a mini-run on the bank and tomorrow will be taken over by the gov't. As discussed earlier in the thread, B&B relied on interbank lending for a little less than 60% of its funding compared to Northern Rock with a little under 80%.

http://www.ft.com/cms/s/0/1e5b888c-8c06-11dd-8a4c-0000779fd18c.html?nclick_check=1

For context, the bank has assets about one-third of WaMu.

[OneFootInTheGrave]

My claim for 6:1 comes from Halifax www.hbosplc.com/economy/includes/25_07_08Affordability.xls+house+price-earnings+ratio+UK&hl=en&ct=clnk&cd=4&gl=uk

HOUSE PRICE - EARNINGS RATIO (All Houses, All Buyers)

Q307 was 5.95 for UK overall, with worst region being South East at 7.59. The ratio is back to 5.39 for Q208 (6.50 in South East) ...

Furthermore, I am not under the impression that mortgage payments/earnings are still below historical levels... I think they are above, but not by a lot... that is true, still with the credit crunch in full swing I cannot see this being such a major "relief" factor...

Shortage of homes should be the real "break" on the prices + low unemployment so the "upper" earning echelon should in theory keep the market under control, however the prices are so much out of whack that with new and stricter (back to normal) lending standards there is simply not enough people to get that mortgage to slow the slide... if we add the million + of let to buy mortgages on the market... just a minor further tremor (like further rise in unemployment, causing rent prices to go down, forcing a few % points of those buy to let to sell in a short period of time) will cause proper saturation and a start of a wipeout under current conditions... perhaps 700bn from US can slow things down and halt the slide with easier credit again being available, but remains to be seen whether this will happen. Without looser credit I cannot see UK house market just gently sliding... in 12 months from now UK should have it's own housing armageddon in full swing...

[Colon™]

that is true, still with the credit crunch in full swing I cannot see this being such a major "relief" factor...

Last time I checked spikey seemed to think the credit crunch wasn't much of a big deal:

And to polish off, my best guess at this stage is that other lenders will find the part of the 'credit crunch' that predominantly affects them (the first part) manageable, as indeed they should

[DrSpike]

Originally posted by DanS
Bradford & Bingley experiences a mini-run on the bank and tomorrow will be taken over by the gov't. As discussed earlier in the thread, B&B relied on interbank lending for a little less than 60% of its funding compared to Northern Rock with a little under 80%.

http://www.ft.com/cms/s/0/1e5b888c-8c06-11dd-8a4c-0000779fd18c.html?nclick_check=1

For context, the bank has assets about one-third of WaMu.

Worst part is when the story broke yesterday my browser kept crashing, which can't be a good sign.

[DrSpike]

Originally posted by OneFootInTheGrave
My claim for 6:1 comes from Halifax www.hbosplc.com/economy/includes/25_07_08Affordability.xls+house+price-earnings+ratio+UK&hl=en&ct=clnk&cd=4&gl=uk

HOUSE PRICE - EARNINGS RATIO (All Houses, All Buyers)

Q307 was 5.95 for UK overall, with worst region being South East at 7.59. The ratio is back to 5.39 for Q208 (6.50 in South East) ...

Link doesn't work - but that's price/earnings not price/income. For obvious reasons the first index is higher.

Originally posted by OneFootInTheGrave

Shortage of homes should be the real "break" on the prices + low unemployment so the "upper" earning echelon should in theory keep the market under control, however the prices are so much out of whack that with new and stricter (back to normal) lending standards there is simply not enough people to get that mortgage to slow the slide... if we add the million + of let to buy mortgages on the market... just a minor further tremor (like further rise in unemployment, causing rent prices to go down, forcing a few % points of those buy to let to sell in a short period of time) will cause proper saturation and a start of a wipeout under current conditions... perhaps 700bn from US can slow things down and halt the slide with easier credit again being available, but remains to be seen whether this will happen. Without looser credit I cannot see UK house market just gently sliding... in 12 months from now UK should have it's own housing armageddon in full swing...

Possibly. I don't think we're there yet.

[pchang]

Are we there yet?

How about now?

[DrSpike]

Why - what's happened?