UK,US and Eastern European housing markets face problems in 2011

23rd December 2010 by Shaun Richards

After pointing out yesterday that asset markets in general have had a good 2010 I wish to refine my point slightly with respect to equity markets. With the American S&P 500 closing up again at 1259 and the UK FTSE 100 rallying to 5983 and the German DAX closing at 7066 there is no refinement needed for the main western markets. However the pattern for the Far East has by no means been as good. For example the Japanese Nikkei 225 has had a good end to the year but remains lower than when it started it if only just. The Chinese Shanghai Composite equity index fell this morning and is down 12.9% overall in 2010 . The Australian ASX 200 index is down 1.47% which I have to confess is a particular surprise in an asset/commodity rich country. So those who went to Far East stock markets in the hope of economic growth leading to stock market gains have had a poor year.

Chinese interest-rates rise

The last couple of weeks have been dominated by the debate as to whether China would raise her interest-rates and when if she does. This would be in response to the uptick in her consumer price inflation rate to 5.1% that I wrote about on the 13th of this month. My opinion was and indeed is that in the end they are likely to have to raise interest-rates and it would be better if they got on with it. Not all economists share this view as I was reading an article yesterday suggesting that there would be no rate rise and if there was it wouldn’t do any good. Unfortunately for that author in an accident of timing I guess Chinese 7 day repo interest-rates have surged this morning by 1.5% to 5.67% as a liquidity squeeze hit home. So in a way China may well be getting a rise in interest rates without an official announcement. The increase in reserve ratios combined with a year-end liquidity squeeze may mean that markets will do the job for now, a slightly unusual position for a command economy to adopt perhaps but the facts are simply thus.

US Economic Growth and Housing Market

After slightly disappointing figures for UK economic growth yesterday markets waited for a similar update from the United States.  Unlike the UK  real GDP growth for the third quarter of 2010 was revised up slightly to 2.6% from 2.5% and as this is an annualised rate it was an improvement but a very marginal one.  However if we look at the breakdown of the statistics there were some troubling influences. For example Personal consumption expenditure (PCE) growth was revised down to 2.4% from 2.8%, and changes in private inventories were estimated to contribute 1.61 percentage points to GDP growth compared to 1.30 percentage points in the 2nd estimate. This means that growth is likely to be lower than previously thought in the fourth quarter and maybe in the early part of 2011 as private inventories have expanded a lot in 2010 and are likely to be approaching a limit. There was hope that they would be replaced as an engine of growth by consumption but this now seems a weaker influence.

So it turned out that an improved headline figure was combined with a breakdown that had troubling implications for future economic growth. This was added to by figures from the US housing market as the level of existing home sales was at 4.68 million not as good as some had forecast and the fact that the overhang or inventory is 9.5 months is not good for a November in what is a very seasonal market. In short the report from the National Association of Realtors tended to suggest that house prices will continue to decline.

So in conclusion the picture for the US economy looks rather mixed. Some economic growth but not enough to put a dent in the level of unemployment and falling house prices. To this mix we have asset purchases by the Fed. and the tax cut/stimulus programme to factor in for 2011 but perhaps they do not now look quite so likely to lead to the improvement in the US economy that places such as Goldman Sachs have suggested.

 The UK Housing Market

I wrote an article recently for the mindful money website where I suggested that the way that the Bank of England was ending its Special Liquidity Scheme could lead to a reduction in the supply of mortgage finance (with the implication it could reduce bank financing activity overall). Some specific numbers were as follows.

In total the Bank of England provided some £185 billion of support for the UK banking system in this way. It is now in the process of withdrawing this support which begs the question where will the banks get the money from? The scheme had been reduced to £128 billion by the end of September of this year but in the two months to the end of November it fell by a further £18 billion to £110 billion. Now if we look at this from the point of view of our banking system we can see two things. Firstly, liquidity has been withdrawn and secondly they can expect this reduction in liquidity to continue until the January 2012 deadline.

I thought then and indeed still do that this is an unwise strategy at this time  and wondered about the possible effect on our housing market. Accordingly I was interested to see this today in the report of the British Bankers Association on housing finance in November.

Gross mortgage lending of £7.8bn in November was 13.5% lower than a year ago. Net mortgage lending increased by £1.5bn November, the lowest increase since August 1999, compared to £3.4bn in the same month in 2009.

They also have some charts for net and gross mortgage lending since November 2006 which in essence both show a declining trend. Now whilst I am not suggesting that a return to those heady overheated days would be wise but what I am suggesting is that we are supposed to be in a phase where our banks are recovering or at least that is what we are told. Personally I feel that this is very questionable and the evidence of the lending to the housing market makes this clear. The Bank of England should take much more care in withdrawal its liquidity schemes in my view as 2011 is already set up to be one for a weak housing market and it would not take a lot to accelerate price falls.

Eastern European Housing Markets have a problem

After writing on Tuesday about how many borrowers in Eastern Europe had taken out mortgages in other currencies with the Swiss Franc to the fore because of its history of low interest-rates I thought that I would highlight the impact this must have on housing markets there. The Euro/Swiss Franc exchange rate is now 1.2495 so the Swiss Franc has extended it rise even further. If we look at the specific case of Hungary then those with Swiss Franc mortgages have seen their debt rise by nearly 2% since then and their debt is now 10% higher than a month ago. These sort of figures must be a millstone around the necks of the mortgage and housing markets in this area.


I wrote yesterday on the subject of Allied Irish Bank and the way that concerns over her in particular but Irish banks in general were continuing to affect Ireland even after her rescue package.

Added to this Allied Irish Bank placed more than 9 billion Euros with the bad bank Nama leading the blogger Jagdip Singh who has a good track record to question if AIB is solvent.

It seems that this suggestion was well founded because today the Irish Times has announced  that the Irish government has drawn up plans to put a further 3.7 billion Euros into AIB. This will need to be followed by another 6.1 billion Euros next year if she is to met the new capital requirements. I do not know about you but suddenly the 85 billion Euro rescue package seems a lot smaller. Also the 3.7 billion will be provided by the National Reserve Pension Fund which in my habit of sometimes addressing economic issues with song titles has me imagining Irish pensioners singing “What have I done to deserve this?” by the Pet Shop Boys.

Also the law of unintended consequences may have an impact here too. So far Ireland has managed to keep the debt issued by its bad-bank NAMA off its sovereign debt but as it is about to in effect nationalise AIB which is a NAMA shareholder then this piece of Eurostat approved financial alchemy is likely to come to an end which will raise Ireland’s national debt by some 30 billion Euros.

14 thoughts on “UK,US and Eastern European housing markets face problems in 2011”

  1. James Noble says:

    Fascinating as ever, Shaun. The more you present the facts as they are, the more I feel that our leaders have absolutely no clue about the situation. I was trying to find a simple way of getting the scale of the problem across and realised that the Government interest figure of £150 million A DAY paid by the UK represents about £3 each a day. For a family of four, the annual interest bill works out at £4,380. This is before any government expenditure on anything else. Are my figures wrong? If so, surely something has to give soon.

  2. SeanBroseley says:

    Shows that in some markets active managers are important. Very pleased with the returns of First State Asia Pacific Leaders and Aberdeen Emerging Markets in the last 12 months or so.

    1. Hi Sean
      I meant to reply to this ages ago… I agree far too many fund managers take fees which are at the same level as active managers and then act “as if” the fund was passively managed. It is not an easy game with the worlds markets being dominated by large corporations and with so many asset classes offering correlation rather than diversification, but the truth is that the genuinely good seem to manage it.
      Which ones do you think might do as well this year?

  3. Mr.Kowalski says:

    Hi Shaun.. can you explain these FX swap lines in layman’s English ?
    As I understand it, the ECB can thus borrow money in USD.. or no ?

    1. Hi Mr.K
      In effect the Fed. is offering its services as lender of last resort to the world rather than the US system alone. If you want dollars it is promising to supply them. There are reverse agreements in that the ECB would supply the Fed with Euros and the Bank of England pounds but no-one really expects those to be used much if at all ( although this crisis has taken many unexpected turns..).

      In truth the place that looks most likely to be in need of it might be the ECB and the likely crisis points are fairly obvious I guess. After all the ECB has just doen a similar deal with the Bof E so it can access pounds if necessary to help Ireland. But there might be other problems as Austrian and Scandanavian banks were involved in the Swiss Franc borrowing splurge in Eastern Europe.

      Someone does keep borrowing dollars from the ECB.It is only smallfry at 60 million which has risen to 75 million but I were Mr.Trichet I would be looking to find a way of ending that because if nothing else it looks odd…..

  4. Alex Eames says:

    “The Bank of England should take much more care in withdrawal its liquidity schemes in my view as 2011 is already set up to be one for a weak housing market and it would not take a lot to accelerate price falls.”

    Sean, what is your opinion on the level of UK house prices? It seems to me that the whole UK financial system is propped up on the back of artificially inflated house prices. But I’m not an economist.

    I realise that if house prices decline rapidly it will create a “big mess” but surely, as with economic growth, it can’t keep going up and up for ever can it?

  5. Alex Eames says:

    Oops. Sorry for misspelling your name in the above post Shaun.

    1. Hi Alex
      No problem. As to your question my answer is as follows. We are likely to see house price declines in 2011 and I think that some of the estimates of say 2% are rather optimistic. As ever there will be winners and losers from this and I do not wish those in marginal circumstances any ill. But the balance in UK house prices got out of control and become unaffordable for first time buyers. My preference would be for a couple of years of single-digit declines to start to rebalance things. However with moves like the Bank of England is making then there is a more dangerous scenario where lack of mortgage finance could see prices fall much more sharply. As the economy is still in a vulnerable state this would not benefit us which is why I argue against it. For a start a lot of repossessions would affect the banking system.

      I am talking about general house prices not the super-penthouses in London which seem to go up and up and are in a way a symbol of the gross economic inequalities that are one of the features of life today

  6. Bones says:

    Hi Shaun,
    I do not want to be alarmist however the NZ GDP September 1/4 has just been released. -0.2%. The June 1/4 has also been revised down from 0.2% to 0.1%. Therefore we are a whisker away from a recession. I can also confidently predict that the December 1/4 will be negative (I work at the coalface) and we have had a 7.1 earthquake in September which has caused anywhere up to $5b (and possibly more) worth of damage. This has caused a lot of small to medium business who where under severe strain to hit the wall. To make it worse the Govt tax take is well down and the deficit is ballooning out of control. Add inflation to this mix (petrol has gone up by over 10% since September) and we have an economy which is in the process of hitting the wall and with very little wiggle room to maneuver if some unexpected shock comes along.
    I feel we are the canary down the mine as we were the first OECD economy to go into recession in 2008. I hope we do not lead the northern hemisphere down the tube!
    I want to take this opportunity to wish you and your family a Merry Christmas and I hope things warm up a bit for you. I also wish to extend season greetings to all your contributors who always given me food for thought. Most of all Shaun I want to tank you for this blog and your thoughtful insights. Keep up the good work.
    Finally, are you coming out to the World Cup next year? If you are considering it My wife and I would be honored to put you and your significant other up should you make it to Christchurch. I am sure you would enjoy yourself.

    1. Hi Bones
      Firstly thank you for your kind offer. For now my thoughts remain stuck in England’s current sporting battle with your neighbours! As you can imagine the current sequence of events is going down rather well over here.The Barmy Army’s version of Joy Divisions “Love will tear you apart again” which they sing as “Swann will tear you apart again” hasn’t needed to be aired much as our other bowlers have mostly done the job and avoided us needing our best one.
      I have taken a look at some NZ government forecasts and they were much more optimistic than what now appears to be taking place. Is this the effect of the earthquake or has something else changed in 2010? Also the pattern of your government bond yields I would have expected to have been better has something happened in this sphere to offset your relatively low debt levels as a nation? What has caused your disappointng tax receipts?

  7. theyenguy says:

    In the linked report, I wrote that moneyness has come to financial shares globally from those seeking safe haven from sovereign debt crisis.

    There has been not only an increase in value in the United States, as is seen the small cap revenue shares, RWJ, but also in Financial Shares Globally, IXG, with the exception of China Financials, CHIX, Bank of Montreal, BMO and some South American Banks, such as BBVA

    Leveraged Buyout Firms, PSP, such as Solar Capital, SLRC, and Gladstone Capital, GLAD, have risen. Nasdaq Community Banks such as Community Bank Systems, CBU, have gone parabolically higher as have Wall Street Financial Services, IYG. Those at Goldman Sachs, GS, and the Chicago Mercantile Exchange, CME, should have a good bonus this year.

    The European Financial Institutions, EUFN, entered into an Elliott Wave 3 Down on December 13, 2010 at a price of 21.84 immediately before the European Leaders Met In Summit and unfortunately were unable to come to a comprehensive solution as to the sovereign crisis: as John Mauldin relates they simply “kicked the can down the road”. It was at this time that the major currencies, DBV, and the emerging market currencies, CEW, turned lower also in an Elliott Wave 3 Down as sovereign debt interest rates rose and world government bonds, BWX, turned lower.

    Debt deflation is the future. Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

    As most are painfully aware banks will need to revive, that is renew their balance sheets soon with new debt issue. No one, nada, absolutely no one, is going to buy bank debt. Investors are short selling European bank debt and buying credit default swaps on the banks.

    Ambrose Evans Pritchard of The Telegraph reports today that the cost of default insurance on eurozone bonds has surged to an all-time high on reports that Greece is preparing the way for a sovereign debt restructuring after 2013, with tacit support from the EU authorities.

    I wish you and all the best of a holiday. Thanks for your dedication to this blog, it is one I read daily. I like the facts you come up with; they just are not being report else where.

  8. Ian Jones says:

    Regarding house prices, the quicker they move back to normality the better for the economy. At the moment RPI is running at nearly 5% a year so a fall in house prices of 5% would mean a 10% adjustment. After 3 years houses will be back in alignment.

    Of course this is a sort of sharing the cost between savers and debtors rather than one side or the other taking the hit. Fair, I dont think so!

    1. Hi Ian
      I agree that we need some rebalancing in our housing market as I do not believe that it has properly adjusted yet for the recession we have just seen let alone the fact that looking ahead 2011 is likely to bring its own particular problems for the housing market. However in my opinion a gentle drift lower is one of the better options I feel. One of my main reasons for thinking this is that there are dangers of more of a rout and I feel that such a move would destabilise the rest of the economy.
      I know that the mainstream media in the main avoids reporting the dangers to our housing market so let me try to explain my fears.
      1. For some time now actual volumes in the market have been low meaning that there could easily be pent up selling pressure.
      2. There could easily be a shortage of mortgage finance next year as wherever you look sovereign nations and banks will be issuing plenty of debt next year.
      3.Very few ever forecast price falls of any size but even in an industry with an obvious bias for forecasting price rises there are more and more forecasts of minor falls.
      4. Many of the mortgage deals which were on very good terms from the pre credit crunch era will be ending soon or have ended so average mortgage rates will be rising.
      5. Any continuation of the recent rises in longer-term interest-rates will make fixed-rate mortgages more expensive.

      There factors are drip/drip effects but my worry is what happens if they reinforce each other? This will be in a market where volumes are low for example nothing has sold near me since the spring which is unusual and when it did it showed that in the bubble of central London prices in early 2010 were more or less where they were in 2007! Where I am writing from now however (my parents) in a small estate of 12 houses some 3 houses are up for sale or have been up for sale recently so I am monitoring it to see what happens. So far some offers have been reduced but still there does not appear to be much sign of buyers……

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