Credit deflation and the reflation cycle to come (part 3)

[Majorpain]

Slightly out of date as its come down recently, but its a good chart to show how mad Gas went in relation to crude.  $340 for a barrel of crude would collapse things quickly.

[Plan-b]

So in the end what was it all for?

A list someone compiled to highlight the amount of schemes and efforts made to keep house prices high - shocking. Just in case its thought it all happened by accident         

BTL

Dual income mortgages

Interest only mortgages

BTL tax advantages

Interest rates

Relatively lower Basel capital requirements/risk weightings for property backed assets

'Postponed' council tax revaluations

Less regulated BTL lending

Funding for Lending

Newbuy Guarantee

Firstbuy Scheme

Homebuy

FIRE sector party donations

Help to Buy equity loans

Help to Buy mortgage guarantee

Shared Ownership

PFI

Housing benefit

Support for Mortage Interest

Build now pay later Scheme

New Homes Bonus

Affordable Homes Programme

Get Britain Building Fund

Builders Finance Fund

Right to Buy

Proposed building standard and regulation cost cutting

Looser residential planning approval rules for offices/commercial property

Releasing more public land for private rather than public uplift

New homes zero-rated for VAT

Build to Rent Fund

Stamp duty reforms

Rental Deposit Loan Scheme

Help to Buy ISA

Pension/inheritance reforms

'Discounted' starter homes

Expropriating HA properties

Raising inheritance tax limit for property

Housing Growth Partnership

Starter Homes Fund

Business Rates reforms

Starter Home Scheme

Right to Acquire

'Pay to Stay' social rents

Preserved Right to Buy

Self 'Build' Portal

Discounted Sales

Part ownership - Resales

Part ownership - HOLD

Part ownership - OPSO

Part ownership - Social HomeBuy

MoD Tenancy Deposit Loan Scheme

Forces Help to Buy

'Starter' Homes Local Authority Funding Programme

The Community Pub Business Support Programme

Coastal Communities Fund

Term Funding Scheme

Home Building Fund

Capacity Fund

'Affordable' Housing Guarantees Programme

Estate Regeneration Fund

Rent to Buy

Public land for Housing/Accelerated Construction Programme/Large Sites and Housing Zones Fund

Garden Cities Towns Villages

Starter Homes Land Fund

Care and Support Specialised Housing Fund: phase 2 (private sector developments)

'Affordable' Homes Programme funding expansion

Enterprise Zones business rates relief

Housing Infrastructure Fund

Digital Infrastructure Fund

Business rates relief for broadband installers

Land Release fund

Build to Rent boost

Term Funding Scheme (APF) limit increase

Northern Cultural Regeneration Fund

---------

FTB stamp duty relief

£10 billion new funding for Help to Buy Equity Loan

Cash boost for garden towns

Planning Delivery Fund

Housing guarantee scheme - private rented sector

Relaxation of permitted development regs for agricultural buildings

Statutory business rates exemption for plant nurseries

Coastal Revival Fund

Move On Fund

Voluntary Right to Buy Pilot (housing association tenants)

Pub is The Hub funding

£1.3 billion Land Assembly Fund

£630 million Small Sites Fund

£1 billion Housing Delivery Fund

[Majorpain]

https://www.theguardian.com/business/2021/dec/27/fears-of-higher-uk-home-prices-as-habito-launches-7x-mortgage

Quote

A mortgage lender is letting homebuyers borrow up to seven times their income – well above the traditional maximum – which it says will allow some to buy a property they might have assumed was well out of their price range.

Habito’s new formula for calculating how much people can borrow is considerably higher than the industry’s typical maximum of between four and five times salary, and while it could allow some buyers to scale up their property-buying ambitions, it could also revive debate about responsible lending practices.

7 times income but over 40 years.  Northern Rock 2.0?

Massive two fingers up at BOE.

[CannonFodder]

27 minutes ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

Perhaps think of it that a bank borrows a £1 and then lends it out again 25, 40 or 75 times, the same £1 i mean.

At 1% interest, it costs 1p to borrow and 75p in income so 74p profit

At 10%, it cost 10p to borrow and 750p income so profit is £7.40 on every £1 they borrow from central banks.

High interest rates are not bad for banks.

This is very oversimplified.

[Bobthebuilder]

9 minutes ago, CannonFodder said:

Perhaps think of it that a bank borrows a £1 and then lends it out again 25, 40 or 75 times, the same £1 i mean.

At 1% interest, it costs 1p to borrow and 75p in income so 74p profit

At 10%, it cost 10p to borrow and 750p income so profit is £7.40 on every £1 they borrow from central banks.

High interest rates are not bad for banks.

This is very oversimplified.

This no longer applies, rules have changed.

Banks are bust.

[CannonFodder]

13 minutes ago, Bobthebuilder said:

This no longer applies, rules have changed.

Banks are bust.

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

[wherebee]

5 hours ago, CannonFodder said:

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

Yes, IF they can get through the collapse.  The 70's period of high inflation was not entered into by banks having on their books volumes of mortgagees who could not afford a 2% rise in rates.  Very few people lost their houses in the 70's from repossession - the public housing sector was much larger (pre buy to let) and the rental market was slumlords with little bank debt.

I think banks will be OK because, simply, fiat collapse is coming.  The GBP and AUD will be worth- in real terms - much much less.  House prices will stay flat in nominal fiat terms, but drop a lot in real terms.  If people hand the keys in, the banks will sell, get the mortgage covered, and not show a loss on the books (although it will be a loss in real value terms). 

The only ones that might be fucked is where the value of the properties the loans are secured on goes down a lot.  I could see student flats, inner city flats, etc, taking a big hit.  Of my sons mates, all about to enter final year, not one is planning on Uni.  most are going to do a year or two work - they want cash, and don't like remote learning (which is what aussie unis have been doing now for 2 years).  That will decimate the student lets industry.

[CannonFodder]

I agree there will be some properties where the banks lose money but in aggregate the majority of properties will cover their loan or pay the rates. People will lose houses as bank profits increase.

The riskier mortgages will be the most recent as Ltv high without time to pay off. Banks will try to limit these as things get going naturally. Refuse remortgage or sell to vulture

GOV wont like this, question is whether we see a freddie fannie NAMA in the UK

[Democorruptcy]

9 hours ago, CannonFodder said:

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

Bank shares on BoE days recently prove your point. In November when they were expected to raise bit didn't bank shares had a bad day. On the day they did raise bank shares went up.

 

[DurhamBorn]

10 hours ago, Lightscribe said:

As I’ve said before on here. The BK will bankrupt the majority of the population through stocks/pensions/houses/debt/cost of living.

Too big to bail out so planned controlled economic demolition and asset forfeiture. Very few (like us on here) will be able to economically survive the decade. We won’t be left alone either, all assets will be fair game and taxable for the benefit of the many rather than the few.

That then paves inroads for UBI, social credit scores and CBDCs.

My roadmap is still showing that inflation (and fiscal drag) will do most of the damage.The government has over 50% scrounging from the others now so they wont roll back the state yet.However we will now enter the stage where parts of the state take from each other and fight for the resources.Although the UK population do have pensions,a lot is still in DB.Most of the general population have wealth in housing,so given how far the band is stretched housing will take a lot of the wealth destruction (inflation adjusted).I still think those 60/40 type pensions will also take a lot of pain even more so with fees and in drawdown.

I think you will find more and more people living together to cut down on bills as well.

When i was growing up i knew a lot of people who owned individual shares.Now i only know people in my family.Very few have assets that create an income outside of property.Bennies and BTL.

This thread is really about the fact we were facing (and are now in) a distribution cycle.

 

 

[DurhamBorn]

1 hour ago, CannonFodder said:

I agree there will be some properties where the banks lose money but in aggregate the majority of properties will cover their loan or pay the rates. People will lose houses as bank profits increase.

The riskier mortgages will be the most recent as Ltv high without time to pay off. Banks will try to limit these as things get going naturally. Refuse remortgage or sell to vulture

GOV wont like this, question is whether we see a freddie fannie NAMA in the UK

I think this is right.Banks (and insurers) will make much higher profits from rates that should cover losses.I think one outcome will be much more social house building and more multi generation living.The banking sector had its balance sheets repaired,the bankrupt now are governments.Of course every £ less the government spends will be then a destruction of a private asset.The reason i wont own banks though is derivative risk.That could take them down,not their own loan book.

[Castlevania]

50 minutes ago, DurhamBorn said:

I think this is right.Banks (and insurers) will make much higher profits from rates that should cover losses.I think one outcome will be much more social house building and more multi generation living.The banking sector had its balance sheets repaired,the bankrupt now are governments.Of course every £ less the government spends will be then a destruction of a private asset.The reason i wont own banks though is derivative risk.That could take them down,not their own loan book.

I disagree. It’s the loan books that will hole the banks. 

[DurhamBorn]

35 minutes ago, Castlevania said:

I disagree. It’s the loan books that will hole the banks. 

Depends on the banks and where their loans sit.Residential loan books can be 60% LTV average.Rates going up make a massive difference here because at 5% the banks can swallow a lot of defaults before they go under due to profits.Main victims will be people losing their equity i think.There will be lots of dislocation ahead thats certain.Key is to keep to the de-complex areas mostly.

These Private Equity loans could be where most danger sits,so anyone lending to them will be in trouble of course.

 

[spygirl]

16 hours ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

Why would you assume that?

The only way to get a stable, strong economy is to follow the Swiss - hard currency, high productivity, low debt, run current account surplus.

Doing what the UK has done for 20y, allowing currency to fall and borrowing loads to let fat Shazza sit on her arse will blow up sooner or later.

With energy costs rising and Fed raising, we are now at later.

 

 

[BurntBread]

29 minutes ago, DurhamBorn said:

Depends on the banks and where their loans sit.Residential loan books can be 60% LTV average.Rates going up make a massive difference here because at 5% the banks can swallow a lot of defaults before they go under due to profits.Main victims will be people losing their equity i think.There will be lots of dislocation ahead thats certain.Key is to keep to the de-complex areas mostly.

These Private Equity loans could be where most danger sits,so anyone lending to them will be in trouble of course.

 

DB, are you staying out of investing in banks for the whole cycle, or are there indicators you are looking for which will tell you that the derivative risk is mostly gone, and that banking stocks might then have a place in a diversified portfolio?

[spygirl]

12 hours ago, CannonFodder said:

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

https://www.bis.org/bcbs/publ/d424_hlsummary.pdf

I dont think UK has a mortgage security market anymore.

Going forward, banks will have to hold 20% capital against mortgages.

20% deposit, 20% from bonds rest drawn down from BoE.

 

[ThoughtCriminal]

25-40% rises for IKEA crap

[DurhamBorn]

1 hour ago, BurntBread said:

DB, are you staying out of investing in banks for the whole cycle, or are there indicators you are looking for which will tell you that the derivative risk is mostly gone, and that banking stocks might then have a place in a diversified portfolio?

Whole cycle.I see no need to own them given risks.I do hold some financials though,M+G ,Abrdn because i think there will be a big wealth transfer ahead between generations coming out of housing and gilts into investments.I also hold DirectLine,very recent addition.Inflation and tax are the biggest risks to wealth this decade for me.

[spygirl]

2 hours ago, BurntBread said:

DB, are you staying out of investing in banks for the whole cycle, or are there indicators you are looking for which will tell you that the derivative risk is mostly gone, and that banking stocks might then have a place in a diversified portfolio?

I can understand why people would want to work for bank - retail or investment.

I cant understand anyone wanting an equity investment.

 

[M S E Refugee]

These two are on live at 4.15pm.

[Roger]

15 hours ago, CannonFodder said:

Perhaps think of it that a bank borrows a £1 and then lends it out again 25, 40 or 75 times, the same £1 i mean.

At 1% interest, it costs 1p to borrow and 75p in income so 74p profit

At 10%, it cost 10p to borrow and 750p income so profit is £7.40 on every £1 they borrow from central banks.

High interest rates are not bad for banks.

This is very oversimplified.

Is this not far too simplified?

This bank has £1 of capital. It has £75 of lending on the asset side of its balance sheet. So it still has to find £74 of funding from the markets. In the absence of any crazy central bank schemes, it'll have to pay a market interest rate on that.

[stoobs]

Banks create money at the point of issuing a loan.

That money is then destroyed when the loan is repaid.

The bank does not need to obtain that money from anywhere else as it didn't exist before the loan was issued.

[JMD]

16 hours ago, Majorpain said:

https://www.theguardian.com/business/2021/dec/27/fears-of-higher-uk-home-prices-as-habito-launches-7x-mortgage

7 times income but over 40 years.  Northern Rock 2.0?

Massive two fingers up at BOE.

I think long term/lifetime fixes are precisely what the BOE want to see far more of. Habito are offering 60% LTV at approx. 3% for 25 years - this is if you accept erc and 10% max overpayments, which maybe suggests they want long term customers? Is the Habito approach the lending model that government wants to see, so they can raise rates with impunity?      ...Not a panacea of course but government won't get the blame if homeowners suffer nasty consequences, which is of course the idea, and government can even become the heroes of the story if decide to back the failing lenders with government bonds, in return for big share of the nation's housing equity. And perhaps this is the way governments make themselves appear solvent for the next twenty years?!

[spygirl]

50 minutes ago, stoobs said:

Banks create money at the point of issuing a loan.

That money is then destroyed when the loan is repaid.

The bank does not need to obtain that money from anywhere else as it didn't exist before the loan was issued.

CB create the money  at the banks request.

Moneys is destroyed by IR and paying back the debt.

The big booms in UKHPI were both down to gormless fuckwittery which inflated banks liabilities with no repayment -

Endowment mortgages 1985-1995ish.

IO mortgages 2002-2008.

 

Heres a nice chart, which puts the changes in an easy to see chart

https://ourworldindata.org/grapher/leverage-ratio-of-banks-in-the-uk-and-us-19602018

Bank leverage has gone back to where it was pre 1984.

 

[spygirl]

5 minutes ago, JMD said:

I think long term/lifetime fixes are precisely what the BOE want to see far more of. Habito are offering 60% LTV at approx. 3% for 25 years - this is if you accept erc and 10% max overpayments, which maybe suggests they want long term customers? Is the Habito approach the lending model that government wants to see, so they can raise rates with impunity?      ...Not a panacea of course but government won't get the blame if homeowners suffer nasty consequences, which is of course the idea, and government can even become the heroes of the story if decide to back the failing lenders with government bonds, in return for big share of the nation's housing equity. And perhaps this is the way governments make themselves appear solvent for the next twenty years?!

Again, habito is made up bollocks.

What the BoE wants is a large deposit, a lot of bank capital and a chunk of bonds with a 5y fix.

BoE wants its capital at the end of a long list of other creditors.

40%+ deposit and a 5y+ fix and you can get a pass the affordability checks n hoop jumping.