Tuesday, August 02, 2011

IMF wary of "steep drop" in UK house prices!

The latest Article IV notice on the UK economy is here. Titled "Union Jack be nimble, be quick" presumably a sign of the trivialisation of the Fund following the arrival of Mme Lagarde. There are few reasons to smile in the content. The Daily Telegraph, in its coverage this morning, selects this portion to quote:

The scale of household debt remained a threat to the recovery, it added, warning that the Bank of England would have to raise interest rates “gradually” due to the “potentially large effects of higher interest rates on growth”.

“In particular, growth remains vulnerable to a steep drop in house prices, which in turn are highly sensitive to short-term interest rates,” said the Article IV notice, the IMF’s annual “health check” on the economy.

I first suggested a means of easing the plight of the UK house price crisis in September 2008, as again quoted below, since I have repeatedly warned of the danger of Walkaways and horrors of negative equity, read here:

'What value maturing mortgages' Ironies Too Sunday 21/9/08- A "Professor" whose name I twice missed, but one time member of the Bank of England's Monetary Committee was doing the rounds of the 24 hour TV news channel last week stating that mortgages were worth their face value on maturity. It was clear from the interview with the clearly demented Prime Minister Gordon Brown on Friday on Sky News, that it is this mistaken view that is now driving the British nation into ever deeper bankruptcy. Let me explain. 1) If I am a supposed homeowner with a mortgage of eighty per cent of previous values I have a 20 percent share of that price. If prices fall by 10 percent I still have an equity share of 10 per cent and will therefore continue with my mortgage payments in the expectation of future house price rises and a desire not to lose that 10 per cent stake. 2) If I am a supposed homeowner with a mortgage of ninety per cent of previous values I have a 10 per cent share of that price. If prices fall by 20 per cent I have negative equity of 10 per cent and if prices are forecast to continue to fall I have zero incentive to continue the mortgage payments on a property over-valued by 10 per cent. As prices fall and re-possessions mount there will be a growing stock of unoccupied housing exposed to squatters and/or a tumbling rental market causing more foreclosures in the buy to let sector further exacerbating the problem. Hence the panic in the property industry to hide the true depth of the collapse. A mortgage maturing in 20 odd years at face value with inflation above 5 per cent is worth very little on present day values. A mortgage maturing several years in the future in a high inflation environment with no interest payments being made is on a discounted cash flow basis effectively worthless. The losses must lie with the mortgage lenders who made the loans on their assessments of present and future property prices, they can hardly now expect the borrowers to bear the full brunt of their 'professional' errors, if they do (as seems to be the case at present) then they are likely to be mistaken in my view. That is why the Halifax will now likely end by bringing down Lloyds TSB. Where Britain and Brown (if still in post) go from there is anybodies' guess! (Emphasis in last sentence added by blog editor 2/8/11)

My suggested cure was posted the following day, linked here.

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