Housing Bubble Bursting

Tom123

iguana wrote:

http://www.independent.ie/business/personal-finance/latest-news/ge-mortgages-latest-subprime-lender-to-hike-interest-rate-1075773.html

Thanks

DublinWriter

nesf wrote:

What's interesting is that a low risk lender like Northern Rock is having trouble sourcing funds for its mortgages. It's not a sub-prime lender, its not having trouble with people defaulting, it's just having a lot of trouble getting people to put money forward for standard mortgages.

Yes, but NR heavily depends on its holdings of inter-bank CMO (bundled mortgage) products in order to secure the funds in order to pay interest to its account-holders.

It's a really frightening development. These types of small banks are usually the first rung in the ladder to go if there will be a total meltdown.

What's the bets that all their customers will go scrambling to clear out their accounts? Most of NR's products are based on 30/60 day notice periods for withdrawing funds.

RuggieBear

DublinWriter wrote:

Yes, but NR heavily depends on its holdings of inter-bank CMO (bundled mortgage) products in order to get its leverage to secure the funds to pay interest to its account-holders.

It's a really frightening development. These types of small banks are usually the first rung in the ladder to go if there will be a total meltdown.

What's the bets that all their customers will go scrambling to clear out their accounts? Most of NR's products are based on 30/60 day notice periods for withdrawing funds.

have to admit i'd be queing at the door of Northern rock this morning to get everything i had from them:o

MG

In the context of the bursting housing market, I was reading the Examiner property supplement last Saturday when I commented to my wife how it was incredible how prices were holding up (or rather people's expectations of house price as little is actually selling) given how much was for sale.

I counted the number of developments advertised in the supplement and I counted about 55 developments advertised (all in Munster, mostly in Cork)

How long will it take for this oversupply to hit prices?

MG

From RTE.ie but hardly reported at all. To me this is a hugely significant statistic - just wait for the AUgust and September figures......

"Employment in construction firms fell by 2.3% in July compared to the same month last year.

The monthly employment index fell from 113.5 in July last year to 110.9 in July 2007.

The monthly Central Statistics Office (CSO) survey questions 1,000 private construction firms which employ five or more people.

AdvertisementThe CSO said that the final figure for June 2007 showed a fall of 1.2% compared with June last year.

This is the weakest reading since December 2002 and confirms the moderation in the construction sector, particularly housebuilding.

Economists suspect the fall in construction employment may be bigger than that measured by the CSO as only firms with five or more employees are measured, and that their survey undersestimates the level of job losses in the sector. "

nesf

DublinWriter wrote:

It's a really frightening development. These types of small banks are usually the first rung in the ladder to go if there will be a total meltdown.

The Bank of England loan might bail them out over the short term but if this doesn't clear over the medium term its model of doing business just won't work.

Colonel Sanders

nesf wrote:

The Bank of England loan might bail them out over the short term but if this doesn't clear over the medium term its model of doing business just won't work.

Yeah its the death knell for their business model. I can't see them going bust (they are an incredibly attractive take over target now surly) however I will withdraw my cash as 4.5% is not ample enough compensation for the risk

patrickolee

Colonel Sanders wrote:

Yeah its the death knell for their business model. I can't see them going bust (they are an incredibly attractive take over target now surly) however I will withdraw my cash as 4.5% is not ample enough compensation for the risk

They will be very worried that many of their customers will panic and follow you. Truth is there is no risk, with the bank of england publicly backing them. But I wonder will rabobank suffer as a result of the publicity nothern rock are getting? Will the Dutch bank back them?

Borzoi

nesf wrote:

What's interesting is that a low risk lender like Northern Rock is having trouble sourcing funds for its mortgages. It's not a sub-prime lender, its not having trouble with people defaulting, it's just having a lot of trouble getting people to put money forward for standard mortgages.

The problem is that the sub-prime fallout is causing investors to stay away from mortgage debt in general due to risk avoidance etc. As the article mentions, the other major low risk lenders are more diversified and can take the credit squeeze a bit better than a specialist mortgage bank like Northern Rock.

This is all down to the US sub-prime mortgage problem and the packaged sell off of these accounts. The knock on has been two fold:

1) The interbank short term lending rate has soared.
2) In general, banks don't trust each other anymore, so there is less money available even at these higher rates

There may be trouble ahead......

tHE vAGGABOND

As a northern rock customer I am indeed worried but not panicing! I have been trying to ring them and indeed log onto their online banking all morning [since I was awoken with the news at 7am] and both are dead as doornails..

My hope is someone buys them on the cheap SOON, given their rubbish share price and things settle down..

*crosses fingers*

Pa ElGrande

tHE vAGGABOND wrote:

As a northern rock customer I am indeed worried but not panicing! I have been trying to ring them and indeed log onto their online banking all morning [since I was awoken with the news at 7am] and both are dead as doornails..

If you want to contact them

Northern Rock have issued at helpline number for customers who wish to contact them. The number is 1850 315115.
http://www.rte.ie/business/2007/0914/Northernrock.html

patrickolee

Pa ElGrande wrote:

If you want to contact them

Northern Rock have issued at helpline number for customers who wish to contact them. The number is 1850 315115.
http://www.rte.ie/business/2007/0914/Northernrock.html

But what would you say to them? What would you hope they would say to you? If you were to take your money out of nothern rock where would you put it? Bank of Ireland, AIB? They haven't been backed by the bank of england and are, as a result, probably riskier. Don't panic, your savings are safer than houses :-)

tHE vAGGABOND

If you were to take your money out of nothern rock where would you put it? Bank of Ireland, AIB?

Im no expert at all here but Northern Rocks problem is that they have a unbalanced portfolio, that is *very* dependent on mortgages [ie: its a gigantic percentage of their total business]. The problem right now is that they have feck all cash at hand, and as a result of banks being worried by the whole sub-prime thing, no one will give them short term cash at any kind of rate to tide them over in short term. The made a profit of 200 million last quarter, and still estimate to make a profit next 1/4, altho a much reduced one. But alas for them if you have no cash at hand you cant pay your bills and all that

Where Im pretty sure most Irish banks are ok, as they have a very diverse portfolio as they have their fingers in every pie possible

Sorry for dragging thread ot

BendiBus

So to reiterate an earlier post I made in the light of NRs difficulties.

- Banks are nervous about lending to each other
- Banks have to pay more interest to compensate for the percieved risk to the lender
- They pass the increased cost on to the consumer in increased mortgage interest rates (regardless of static or falling central bank rates)
- The amount people can borrow is reduced
- Further downward pressure on house prices.

The NR problems are extremely relevant to this thread. Yet another pin in the bubble.

patrickolee

... or the ECB drop their rate!

A Random Walk

Lads, let the BOE worry about the "real" problems with NR, if I had more money in NR than is covered by the deposit protection scheme I would take it out. Now is not the time to be an armchair economist.

Colonel Sanders

A Random Walk wrote:

Lads, let the BOE worry about the "real" problems with NR, if I had more money in NR than is covered by the deposit protection scheme I would take it out. Now is not the time to be an armchair economist.

I would if I could get into the bloody website :mad:

BendiBus

patrickolee wrote:

... or the ECB drop their rate!

My 3rd point highlights that even this wouldn't necessarily help. The rate banks charge each other is determined by perception of risk, it's not simply a function of the ECB rate.

patrickolee

BendiBus wrote:

My 3rd point highlights that even this wouldn't necessarily help. The rate banks charge each other is determined by perception of risk, it's not simply a function of the ECB rate.

Yes, but your third point is wrong. It would be a bit like saying the price of petrol is not dependant on the price of crude oil! Interest rate swaps operate on a relatively small margin, the margin is largely dictated by perceived and actual risk. But if the underlying cost of the loan drops by a relatively large amount compared to the banks margin then the cost will fall. It is not in the ECB's or bank of England's interest to have to bail out/prop up/make statements of support for banks in their license. Couple that with the fact that the Base interest rate is within the ECB/Bank of England's control, I think we will see a drop in interest rates if this instability continues.

Dalfiatach

Patrick, this is a global credit crisis and so all bets are off. In a credit crunch, or other crisis, short-term inter-bank lending rates have no relation whatsoever to central bank rates. These things happen all the time, and it's not unusual in times of crisis to see overnight inter-bank rates hitting 100%, with 40% on 3-month inter-bank loans.

And the ECB won't be cutting, no matter what the Fed does. They learned their lesson in 2001. Everybody now expects Helicopter Ben to try and hyperinflate the US out of their debt crisis, but there is absolutely no need for the EU to follow them down that road: and the ECB has seen that the 2001 experiment with ultra-low real-negative interest rates merely took one crashing bubble (dot com stocks) and transmogrified it into a monstrous housing bubble 100 times bigger and more destabilising.

Cutting interest rates is entirely the wrong approach to a bursting bubble. In fact I'd argue the best policy is to raise, thus hastening the collapse and flushing all the junk out the system quicker.

nesf

Dalfiatach wrote:

Patrick, this is a global credit crisis and so all bets are off. In a credit crunch, or other crisis, short-term inter-bank lending rates have no relation whatsoever to central bank rates. These things happen all the time, and it's not unusual in times of crisis to see overnight inter-bank rates hitting 100%, with 40% on 3-month inter-bank loans.

And the ECB won't be cutting, no matter what the Fed does. They learned their lesson in 2001. Everybody now expects Helicopter Ben to try and hyperinflate the US out of their debt crisis, but there is absolutely no need for the EU to follow them down that road: and the ECB has seen that the 2001 experiment with ultra-low real-negative interest rates merely took one crashing bubble (dot com stocks) and transmogrified it into a monstrous housing bubble 100 times bigger and more destabilising.

Cutting interest rates is entirely the wrong approach to a bursting bubble. In fact I'd argue the best policy is to raise, thus hastening the collapse and flushing all the junk out the system quicker.

You make it sound like the ECB might actually base policy on the situation here. The situation on mainland Europe dictates the ECB rate, not the Irish property market. If Germany and France need a 2% base rate then they'll get it regardless of what the effect it would have here tbh.

Dalfiatach

nesf wrote:

You make it sound like the ECB might actually base policy on the situation here. The situation on mainland Europe dictates the ECB rate, not the Irish property market. If Germany and France need a 2% base rate then they'll get it regardless of what the effect it would have here tbh.

Not just here, apparently there's housing bubbles in the UK, Spain, Portugal, France, Greece and Holland, as well as all over Eastern Europe. Ours is just the maddest of the lot. Plus the ultra-low rates led to the total misallocation of risk in the derivatives markets and vast sums pouring into various exotic instruments. The two combined into the pure toxic CDO securatisation scam, the unwinding of which caused the current liquidity crunch in the first place (and which is going to get a hell of a lot worse come October and all those Option ARM resets in the US).

Both of these asset bubbles are a direct result of the far-too-low interest rates that the ECB were panicked into after the Fed slashed their rates in 2001. Also, the experience of Japan has shown that ultra-low rates are of absolutely no effect in a deflationary scenario. In fact, the Japanese ZIRP policy has actually fed their long deflation because it generates the Yen carry trade whereby vast sums leave Japan every year, instead of being invested productively at home. The BoJ could end deflation tomorrow by raising rates to 4%, but that would be extremely painful for all the Japanese still carrying 40-year IO mortgages from the 1990 bubble, so political interference means the BoJ can't act and Japan is doomed to another decade of slump.

We'll never see 2% ECB rates again in our lifetimes. They were a colossal mistake, an insane deviation from historical norms. The lowest we'll ever see ECB rates ever again is about 3.25-3.5%, and I just don't see the ECB being daft enough to cut rates because of the current credit crunch.

Gurgle

Dalfiatach wrote:

Not just here, apparently there's housing bubbles in the UK, Spain, Portugal, France, Greece and Holland, as well as all over Eastern Europe. Ours is just the maddest of the lot.

From wikipedia:

As of 2007, real estate bubbles are widely believed to exist in many parts of the world, especially in the United States, Britain, Italy, Australia, New Zealand, Ireland, Spain, Poland, South Africa, Israel, Greece, Canada, Norway, Singapore, Sweden, Baltic states, India, Romania, South Korea, Russia, Ukraine and China.

We're not topping that list, we're the second richest country in the world and we have one of the fastest growing populations in the first world.

Why do you say our supposed bubble is the maddest of the lot?

miju

gurgle no other country with a bubble has seen over 200% rise in prices

Tom123

Gurgle wrote:

From wikipedia:


We're not topping that list, we're the second richest country in the world and we have one of the fastest growing populations in the first world.

Why do you say our supposed bubble is the maddest of the lot?

Have a look at this data. In my opinion the Irish property bubble has been one of the most extreme properties experienced to date.

Tom123

Almost all the extra properties built over the last 5 years are now empty.
If that's not a sign that we are in a bubble I don't know what is

gurramok

Try 270% rise since 1996, the worst the world has seen
http://www.finfacts.com/irelandbusinessnews/publish/article_10006275.shtml

As with all other countries bubbles, there was a catchup from a low base, so that can't be used as an excuse to dismiss most of 270% rise as catchup!

Nice analysis Dalfiatach, its far superior and informative with facts backed up than the drivel that Irish bank paid based economists in the media come out with.

Gurgle

Gurgle wrote:

From wikipedia:


We're not topping that list, we're the second richest country in the world and we have one of the fastest growing populations in the first world.

Why do you say our supposed bubble is the maddest of the lot?

Do you believe that we are the second richest country in the world? How come the roads are better in Germany Japan the US, the UK etc etc?

This wealth is based on ASSETS - they include houses on the ASSETS list!
Say any random country had a bubble surpassing all others and their house rose ten billion per cent but that they had no jobs absolutely none 100% unemployment and they were literally dying on the streets - they could still be THE RICHEST country on the list provided the house prices were high enough.

WE ARE NOT THE 2ND RICHEST COUNTRY IN THE WORLD

DublinDilbert

Gurgle wrote:

From wikipedia:


We're not topping that list, we're the second richest country in the world and we have one of the fastest growing populations in the first world.

Why do you say our supposed bubble is the maddest of the lot?

If we are the second richest country in the world, how come we are all living in smaller and smaller houses?

If we are the second richest country in the world, how come both people in a couple have to go out and work just to survive?

There are many older people on a pension ( just getting by), who are millionaires on paper due to the value of their houses... Ireland may well be 2nd on the list in terms of the value of houses per head of population, but is this really wealth?

Zambia

DublinDilbert wrote:

If we are the second richest country in the world, how come we are all living in smaller and smaller houses?

If we are the second richest country in the world, how come both people in a couple have to go out and work just to survive?

There are many older people on a pension ( just getting by), who are millionaires on paper due to the value of their houses... Ireland may well be 2nd on the list in terms of the value of houses per head of population, but is this really wealth?

As my lecturer used to repeat every class Tesco do not accept bricks as payment.