Britain’s housing bomb is about to blow
By
Bill Bonner Sep 21, 2007
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We thought some new top in conceit had been reached when we saw last week’s cover of Country Life magazine. “Why the world loves England” was the headline. While the gentry’s rag exalts Britain’s geographic particularities, the headline might be useful for any publication in the country. The travel press could use it in every issue; everywhere you look, holidaymakers find something to like about England. The tabloids pull it out to describe illegal aliens sneaking aboard ferries to make their way into Britain’s robust service industry. And in the financial press, too, that everyone loves England fuels so many heady delusions: such as why property prices always go up, and why Britain’s economy can never go down.
We shall spend the next few minutes explaining why the headline may soon get a rest. Today’s worldwide boom has been the greatest ever. Its leading industry is finance. And the financial capital of the world is London. Ben Bernanke explained the broad outlines of it in his speech in Berlin earlier this week. Over the last few years, he said, oil producers made more money than ever. So too, Asian exporters booked huge surpluses. They were making so much money they didn’t know what to do with it all, ending up with a “glut of savings”.
Ben Bernanke didn’t mention it, but this wash of foreign savings was further pumped up by an extremely liquid and abundant reserve currency – the dollar. Since Paul Volcker left the Fed, dollars gushed into the world financial system, like sewage into a Chinese lake. Any time the flow threatened to weaken, central bankers rushed to open the valves even wider. What to do with all this money? The stars lined up, the heavens smiled. And nowhere was the smile wider and more sincere than over the City. Many rich people moved to London to spend their fortunes. Others turned to London to help hold onto them. What better way to invest it than through London’s sleek financial intermediaries? The money flowed; Britain flourished. But it was a strange, fantastical boom – fuelled almost entirely by credit, the financial industry – and by foreign money. While the City slicker made his millions, the average Englishman felt as thought he had come upon an over-turned liquor truck on his way home from work. He gathered up as many bottles as he could carry – and the party was on! Now, he thinks it will never end. “The City generates so much wealth,” he says.
Alas, a long run of good luck is hard to recover from. What the City really creates is wealth for a few and debt for many. And now, according to Grant Thornton, British debt has surpassed total GDP – a milestone. Most of the debt is in the housing sector, which has pushed up house prices in Britain higher than those in the US and made the UK more vulnerable to a downturn. The ratio of housing prices to disposable income – a fairly stable figure in the US – is a rollercoaster in Britain. Today, it is at its highest level ever, with the last major peak in 1989. Fitch estimates that UK house prices are 20% overvalued and that Britain is one of the three economies most vulnerable to a house price crash/correction (after New Zealand and Denmark).
In America, the National Association of Home Builders says market conditions are the worst in 27 years. Its index of prospective buyers, a leading indicator, is at its lowest level ever. Housing has held up consumer spending and consumer spending has held up the economy. Owners “took out” equity (Mortgage Equity Withdrawal – MEW) in order to continue spending. (Wages actually fell slightly since 2000.) Figures are only available through the first quarter, but they show MEW dropping almost in half from a year previously. That represents an amount of money nearly equal to America’s entire GDP growth.
In America, the subprime borrower loses his house and the economy sags along with housing prices. In Britain, it is the buy-to-let (BTL) speculator who threatens to bring down the price structure. He counts on easy money from the City. But lenders are now wary. The spread of three-month London Inter-Bank Offer Rate over the UK base rate has leapt to a record high. Without fees for sticking bad credits on dim investors, City bonuses are bound to fall and so will the availability of cheap finance. At the margin, the BTL investor is no better off than a US subprime borrower or leveraged hedge-fund hustler. He will have to sell into a declining market to stay solvent. Result: falling prices, less MEW, softening sales, rising defaults, failing economy. Then, everyone won’t love England quite so much – not even the English.
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by
Bill Bonner
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