Monday, 27 August 2012

Halifax Data Points To Collapse Of Housing Market

The BBC have today reported that, according to the Halifax, mortgages are at their most affordable in 15 years - BBC News.  If so, that is very bad news, for those counting on house prices remaining high.  Already, according to Rightmove, 50% of houses put up for sale have not been sold.  Estate Agents have an ever lengthening list of properties for sale on their books, and the average time they stay there continues to get longer.  That is despite house prices continuing to fall by at least double digit figures.

If houses can't be sold even when the cost of the mortgages on them is at their lowest for 15 years, it spells disaster for many, when that situation reverses, which clearly it must.  Its not just that interest rates, which is what makes that affordability possible, are at such historic low levels, but that precisely because of that, there is only one way for them to go - UP.  Moreover, because interest rates are at such low levels, then even small nominal increases in those rates will amount to huge percentage rises.  Anyone who has bought a house that they can barely afford even at these low interest rates, will definitely find they cannot afford the repayments if they rise by 50% or more, which is quite conceivable.  Already, Santander has raised its mortgage rates, because Banks are finding it increasingly difficult to borrow in the money markets, and to attract savers funds, they will need to offer significantly better rates than the current levels.

Ed Yardeni coined the phrase
"Bond Vigilantes", which described the
large investors like himself who eventually
decided yields were too low, and Bond
prices too high.  When they sold,
 Bond prices fell sharply.
In the last week or so, US Yields on Treasury Bonds have risen by around 25%.  Again, the prices of these Bonds of a number of countries have risen to such a level that the Yields have become ridiculously low.  The reason for that is fear in the markets about what might happen in Europe, which has dissuaded investors from putting their money into productive investments.  It is what is called Financial Repression.  But, if you have billions of dollars invested in any of these Bonds, then at current levels you must be constantly vigilant waiting for everyone else to be pulling their money out.  That is how all such bubbles eventually burst.  Its one thing to be prepared to lose a few percent of your investment as a result of inflation, in order to have your money invested in something you think is safe - as opposed to buying Greek or Spanish Bonds, for instance - but, if a large investor, or a large number of investors get itchy fingers, worrying that prices of these Bonds might fall, then their prices could fall by 10 or 20% over night.  That could cause a stampede out of them, as happened with the collapse of the Tech Bubble in 2000.  Sooner or later, this Bond Bubble will burst, and the consequence will be huge increases in interest rates, meaning huge rises in mortgage rates along with it.

That is besides the other problem that homebuyers face.  Mortgage payments might be at a fifteen year low, but the demands on people's wage packets from other sources continue to rise sharply.  The Government has increased taxes and cut benefits.  The cuts to Local Government mean that charges for various Council Services are rising.  Global food prices are rising, as rising living standards elsewhere in the world is causing the demand for food to rise.  The price of Oil has risen by around 20% in the last few weeks, and if Israel attacks Iran, its price could at least double from current levels.  That is feeding through into rising prices, as the last ONS Inflation figures showed.  The energy companies are proposing another 9% increase in prices for the Autumn.  On top of that workers are facing losing their jobs, or else are being forced into self-employment, zero hours contracts, or part-time work.

It all spells disaster for the Housing Market, and that in turn spells disaster for the Banks who hold around £2 Trillion of UK personal debt, much of it in the form of mortgage debt.

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