The credit crisis is hitting the UK Mortgage Sector hard as easy credit mortgage deals have been removed from the high street shelves in recent weeks. Despite the central bank actions to ease financing terms and increase liquidity, this does not address the real issues illiquid mortgage related bonds and expectations that the UK housing market crisis on the back of a wave of foreclosures.
UK Mortgage Banking Sector - Northern Rock on the verge of going bust
For example, credit crunches impact on the banking sector of the UK mortgage, we need look no further than the Northern Rock.Dionica mortgage bank rate has fallen from recent highs of £ 12.58 to recent low of just 6.20 pounds, which a drop of more than 50%. Trading in PE only 7.5 and the yield of 4% can now make a stock seem enticing, but the record in anticipation of a much higher risk of mortgage defaults and repossessions in the UK as the housing market starts to nose dive. These repossessions (foreclosures) are already hitting the likes of Northern Rock expected to triple the rate during the next 6 months compared with the same period last year. This surge in repossessions will impact the earnings of the UK mortgage bank as do an increasing bad debt provisions and issue profit warnings.
This is in addition to any toxic U.S. sub prime related exposure. Therefore, the Northern Rock case of PE of 7.5 could jump many times in the worse case scenario.
UK Adjustable Rate Mortgages (arms) and Liquidity
If an adjustable rate mortgage again named as the hands ageddon in the U.S., then here in the UK they should be termed as Doomsday, as well as more than 90% of all mortgages are adjustable rate mortgages or variable interest rates uu the Britaniji.Kratkoročne fixed deals taken out in recent years, are now back with a vengeance. With UK interest rates to 5.75%, a chance (albeit diminishing one) of the further growth of 6% in October 2007 (UK Inflation CPI Falls But Interest Rates will increase to 6% By October 2007, July 18, 07). UK arm resets will have a significant impact on the UK consumer and send the UK Housing market in downward spiral. To make matters worse credit crisis ensures that lending criteria will be much stricter with much higher interest rates charged by the base rate would imply, ie a greater difference between the Bank of England rate and mortgage interest rates.
The latest figures for new mortgage approvals for July show a 27% decline over the same period a year ago as liquidity continues to tighten with borrowers to refinance much more difficult conditions.
The third impact of the credit crunch on the UK housing market is the loss of 'city bonuses'. If as expected the financial markets remain depressed for at least the next quarter then the year end bonuses may virtually dry up. The City of London many homeowners purchases depend on bonuses to pay off capital as mortgages tend to be many, many times salaries. If the bonuses do not realize it would depress London house prices, which will send another negative ripple through the entire UK housing market.
UK repossessions (Foreclosures)
UK home repossessions continue to rise this year, and forecasts for a total of 34 000 as the end of the year, which is twice more than 17,000 since 2006. Going into 2008 we can be when a refund has not seen since the last housing bust of the early 1990s ih.Hipoteka banks such as Northern Rock can hit hard, which is double the rate reported repossessions.Utjecaj it will mean even tighter borrowing requirements and similar pressures on house prices led by primers such as occurred in the United States. Where expectations are extremely tight credit for those with poor credit histories.
UK Inflation RPI / CPI / Interest Rates
Rate increases from 4.5% to 5.75% in the year have the effect of dissipating the bullish feeling that bore the UK house prices to such extremes.
latest Inflation fell strongly in July, with the CPI falling from 2.4% to 1.9% and RPI falling to 3.8% to 4.4%. But given the extent of growth of money supply, a further decline are likely to be more muted. Chart trend suggests RPI could decline towards support at 3 %.
Latest Inflation fell strongly in July, with the CPI falling from 2.4% to 1.9% and RPI falling to 3.8% to 4.4%. But given the extent of growth of money supply, a further decline are likely to be more muted. Chart trend suggests RPI could decline towards support at 3 %.
Buy to let sector continues to expand strongly with a record number of buy to let mortgages taken during the first six months of this year, despite rising interest rates and falling rental yields. The result is an increasing number of buy to let investors unable to cover their mortgage repayments from rents and therefore rely on capital gains to ensure a profit. If, as expected house prices to tumble then the mad rush by weak buy to let investors to reduce losses could accelerate the decline in UK house prices during 2008.
UK M4 Money supply
UK Money supply growth shows signs that peaked at 14%, however, while the money supply remains at a higher rate of 12.9%, this still suggests higher inflation in the future. I would require a much more significant reduction to below 10% before inflationary pressures expected to ease.
Market Oracle UK House price ratio
above chart clearly shows that despite strong growth in house prices from 1996 to 2006, house prices are still affordable compared to earnings and historically low interest rates, which allowed home buyers to meet mortgage repayments.
But this year the ratio clearly broke above the upper range and has led to an increase in the relative costs of servicing mortgages to the extent not seen since 1992. It will become evident as the impact of mortgage fixes out when interest rates were at or below 4.5% expire as a result of increased risk in the mortgage sector is increasingly variable rate mortgages, especially for those who believe that if the higher risk with poor credit history, which could see their mortgage interest rates double that of say 4% to 8%!
UK house prices
London and South East led the way during the 1980s boom, rising much further than the rest of the country, with the rest of the country continues to rise as London is the pinnacle.
Also today, in the south of England has increased by a much greater extent than the rest of the country, and thus is expected to fall especially hard given the credit crisis in the City of London.
Which resulted in a bear market will undoubtly seek to contract the difference between London and the rest of the country at least 50%. What does it mean decrease of 30% in the Greater London area, as well as the overall UK decline of about 14%. However, the decline in real terms when inflation is taken into account will be much higher.
UK Housing Market Conclusion:
In the UK housing market is expected to drop at least 15% over the next two years. Despite the 2012 Olympics in London is expected to fall as much as 25%. UK interest rates are either at or very near the top, as it is all reduced the chances for further growth in October 2007. After the UK interest rates should be reduced as the UK housing market declines targeting a rate of 5% in the second half 2008.Implikacije for this are that the UK economy starts to sharply lower growth for 2008.
What to do?
- Home owners - If you are thinking about selling your home then it is time for action is now! Waiting until the credit crisis continues to tighten is a big mistake, especially considering the fact that further sharp falls are in the financial markets are just around the corner.
- Cash - Invest in Fixed Interest Bonds issued by large strong banks, avoid issues from mortgage banks such as Northern Rock. Keep in mind that in the UK savers have protection at 90% of the holdings of the first 35k of investments in fixed bonds and savings accounts so bare that limit in mind. Also ensure you use your Tax Free ISA fee.
- Government Bonds - Invest in government bonds, to be willing to hold to maturity, in order to reduce the risk of market volatility
- Government Certifications -. Invest in national Savings Certificates such as index linked and Tax Free Certificates, which are an excellent means for more taxpayer tax rate
- Pada Stock Exchange or the crisis will be an opportunity for kupnju.Burze expected to be volatile as we move into a new risk climate. Despite the high probability of further sharp falls, and even fall, there are plenty of long-term plays out there especially in the big cap oil sector. I would also look at bargain hunting metals and mining on further sharp falls or crashes. Similarly for the utilities, such as water. The best game is probably via investment trusts, many of them. I favor investment trusts over unit trusts as they are traded on exchanges exactly as it was stock. Because, as I recall the previous financial crisis, May you find the phone hook at the other end of the line when you try to call to buy or sell unit trust positions.
- Emerging Markets - I would avoid china, the market price is not at risk and is primed for a collision. India and Russia look enticing especially on sharp falls in sympathy global market sell off.
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