| The Credit Crunch has been hitting the UK Mortgage | | | | therefore are relying on capital gains to provide profits. |
| Sector hard as many easy credit mortgage deals | | | | Should, as expected house prices take a tumble then |
| have been removed from the high street shelves in | | | | a mad rush by weak buy to let investors to cut losses |
| recent weeks. Despite central bank actions to ease | | | | could hasten the decline in UK house prices during |
| financing terms and increase liquidity, this does not | | | | 2008. |
| address the real issues of illiquid mortgage related | | | | UK M4 Money supply |
| bonds and expectations that the UK Housing Market | | | | UK Money supply growth shows signs of having |
| will slump on the back of a surge in foreclosures. | | | | peaked at 14%, however, whilst the money supply |
| UK Mortgage Banking Sector - Northern Rock On the | | | | remains at the elevated rate of 12.9%, this still suggests |
| Brink of Going Bust | | | | higher inflation in the future. And would require a much |
| For an example of the credit crunches impact on the | | | | more significant reduction to below 10% before |
| UK mortgage banking sector , we need look no further | | | | inflationary pressures are expected to ease. |
| than at Northern Rock. The mortgage banks stock | | | | The Market Oracle UK House Price Ratio |
| price has fallen from recent highs of £12.58 to | | | | The above chart clearly shows that despite the strong |
| recent lows of just £6.20, a drop of more than | | | | rise in house prices from 1996 to 2006, house prices |
| 50%. Trading on a PE of just 7.5 and a yield of 4% | | | | remained affordable in terms of earnings and |
| may now make the stock seem enticing, but the mark | | | | historically low interest rates which enabled house |
| down is in anticipation of the much higher risk of | | | | buyers to meet mortgage repayments. |
| mortgage defaults and repossessions in the UK as the | | | | However this year the ratio clearly broke above the |
| housing market starts to nose dive. These | | | | upper range and has led to an increase in relative |
| repossessions (foreclosures) are already hitting the | | | | costs of servicing mortgages to an extent not seen |
| likes of northern rock with expectations of a tripling in | | | | since 1992. This will become more evident as the |
| the rate over the next 6 months as compared with | | | | impact of mortgage fixes taken out when interest |
| the same period last year. This surge in repossessions | | | | rates were at or below 4.5% expire as the increased |
| will impact the earnings of the UK Mortgage banks as | | | | risks in the mortgage sector result in ever higher |
| they make every larger bad debt provisions and issue | | | | floating rate mortgages, especially for those deemed |
| profit warnings. | | | | to be if higher risk with poor credit histories, who may |
| This is in addition to any toxic US Sub prime related | | | | see their mortgage interest rates double i.e. from say |
| exposure. Therefore in Northern Rock's case a PE of | | | | 4% to more than 8% ! |
| 7.5 could jump many fold in a worse case scenario. | | | | UK House Prices |
| UK Adjustable Rate Mortgages (Arms) & Liquidity | | | | London and the South East led the way during the |
| If the Adjustable Rate Mortgage Resets are termed | | | | 1980's Boom, rising much further than the rest of the |
| as Arm-ageddon in the US, then here in the UK they | | | | country, with the rest of the country continuing to rise |
| should be termed as Doomsday, as the more than | | | | as London peaked. |
| 90% of ALL mortgages are adjustable rate or floating | | | | Similarly today, the South of England has risen to a |
| rate mortgages in the UK. The short-term fixed deals | | | | much greater extent than the rest of the country, and |
| taken out over recent years are now resetting with a | | | | thus is expected to fall especially hard given the credit |
| vengeance. With UK interest rates at 5.75%, and a | | | | crunch in the city of london. |
| chance (albeit diminishing one) of a further rise to 6% in | | | | The resulting bear market will undoubtly seek to |
| October 2007 (UK Inflation CPI Falls But Interest Rates | | | | contract the spread between London and the rest of |
| Set to Rise to 6% By October 2007 18th July 07). The | | | | the country by at least 50%. Which implies a decline of |
| UK Arm resets will have a significant impact on the UK | | | | 30% in the Greater London Area, and an overall UK |
| consumer and send the UK Housing market into a | | | | decline of some 14%. however the decline in real |
| downward spiral. To make matters worse the credit | | | | terms when inflation is taken into account will be much |
| crunch ensures that lending criteria will be much stricter | | | | greater. |
| with much higher interest rates charged than the base | | | | UK Housing Market Conclusion: |
| rate would imply, i.e. a greater spread between the | | | | The UK Housing market is expected to decline by at |
| Bank of England's rate and the mortgage interest | | | | least 15% during the next 2 years. Despite the 2012 |
| rates. | | | | Olympics, London is expected to fall as much as 25%. |
| Already the latest figures for new mortgage approvals | | | | UK Interest rates are either at or very near a peak, as |
| for July show a 27% fall over the same period a year | | | | there is an increasingly diminishing chance of a further |
| ago as liquidity continues to tighten with borrowers | | | | rise in October 2007. After which UK interest rates |
| facing much tougher refinancing conditions. | | | | should be cut as the UK housing market declines |
| The third impact of the credit crunch on the UK | | | | targeting a rate of 5% during the second half of 2008. |
| Housing market is the loss of 'city bonuses'. If as | | | | The implications for this are that the UK economy is |
| expected the financial markets remain depressed for | | | | heading for sharply lower growth for 2008. |
| at least the next quarter then the year end bonuses | | | | What to Do ? |
| may virtually dry up. In the City of London many of the | | | | 1. Home Owners - If you are thinking of selling your |
| house purchases are reliant on bonuses to pay off | | | | home then the time to act is now ! Waiting whilst the |
| capital as mortgages tend to be many, many times | | | | credit crunch continues to tighten is a big mistake, |
| salaries. If the bonuses fail to materialize then that will | | | | especially given the fact that further sharp falls are in |
| depress London House prices which will send another | | | | the financial markets are just around the corner. |
| negative ripple through the whole UK housing market. | | | | 2. Cash - Invest in Fixed Interest Bonds issued by large |
| UK Repossessions (Foreclosures) | | | | strong banks , avoid issues from mortgage banks such |
| UK home repossessions continue to soar this year | | | | as Northern Rock. Keep in mind that In the UK savers |
| and are forecast to total as much as 34,000 by year | | | | have protection at 90% of holdings of the first 35k of |
| end, which is double the number of 2006 of 17,000. | | | | investments in fixed bonds and savings accounts so |
| Going into 2008 we could be seeing repossession not | | | | bare that limit in mind. Also ensure you have used up |
| seen since the last housing bust of the early 1990's. | | | | your Tax Free ISA allowances. |
| The mortgage banks such as Northern Rock are | | | | 3. Government Bonds - Invest in Government Bonds, |
| being hit hard, which reported a doubling in the rate of | | | | be prepared to hold to maturity so as to reduce risk of |
| repossessions. The impact of this will mean even | | | | market volatility. |
| tighter borrowing requirements and a similar squeeze | | | | 4. Government Certificates - Invest in national Savings |
| on house prices led by sub primers as has occurred in | | | | Certificates such as the and Index Linked Tax Free |
| the US. Where expectations are extremely tight credit | | | | Certificates, which are an excellent vehicle for higher |
| for those with poor credit histories. | | | | rate tax payers. |
| Uk Inflation RPI / CPI / Interest Rates | | | | 5. A Stock Market Crash or Slump Would be A Buying |
| The Rate rises from 4.5% to 5.75% in a year are | | | | Opportunity. The stock market is expected to be |
| having the effect of dissipating the bullish sentiment | | | | volatile since we are moving into a new risk climate. |
| that has carried UK house prices to such extremes. | | | | Despite a high probability of further sharp falls, and |
| The latest Inflation figures fell strongly in July, with the | | | | even a crash, there are plenty of long-term plays out |
| CPI dropping from 2.4% to 1.9% and the RPI falling to | | | | there especially in the big cap oil sector. I would also |
| 3.8% to 4.4%. However given the extent of the rise in | | | | look at bargain hunting metals and mining on further |
| the money supply, further declines are likely to be | | | | sharp falls or a crash. Similarly for the utilities sectors |
| more muted. The chart trend suggests RPI could | | | | such as Water. The best plays are probably via |
| decline towards support at 3%. | | | | investment trusts, of which there are many. I favor |
| This is enough to keep UK interest rates on hold for | | | | investment trusts over unit trusts as they are traded |
| the time being, which increases the probability that | | | | on the stock exchanges exactly as any stock is. |
| interest rates may now peaked, as by the time the UK | | | | Whereas, as I recall in previous financial crisis you may |
| Housing market nose dives and the economy slows to | | | | find the phone off the hook on the other end of the |
| borderline recession, a further rise in interest rates will | | | | line when you try to call to buy or sell unit trust |
| no longer be on the cards and infact the expectations | | | | positions. |
| will be for cuts in UK interest rates. | | | | 6. Emerging Markets - I would avoid china, the market |
| Interest Rate Conclusion - The Market Oracle | | | | is not pricing in risk and is primed for a crash. India and |
| expectations are for UK interest rates to target 5% | | | | Russia look enticing especially on any sharp falls in |
| during the second half of 2008. | | | | sympathy to global market sell offs. |
| Buy to Let Sector | | | | Whatever you do, remember that today's Idyllic |
| The Buy to let sector continues to expand strongly | | | | pleasant picture in the UK is very shortly in for a rude |
| with a record number of buy to let mortgages taken | | | | awakening, much as the US home owners are |
| out during the first 6 months of the year despite the | | | | experiencing in increasing numbers. The bull market in |
| rising interest rates and falling rental yields. The result is | | | | housing is over for now, better to realize this now |
| an increasing number of buy to let investors unable to | | | | whilst you have the opportunity to do something about |
| cover their mortgage repayments from rents and | | | | it rather than be forced into a decision later on. |