US are mortgages defaulting, but what about UK, Spain, ... ?

Discussion in 'Economics' started by amiga, Apr 4, 2008.

  1. amiga


    Having the experience with US housing, what do you think about UK, Spain and other markets?

    These countries have much in common with US half a year ago:
    1. house prices dramatically increasing, recent data point to slow down or even decline in prices
    2. risk of high inflation, interest rates high
    3. economy slows down
    4. lending standards were poor in all the countries, driven by huge demand from securitisation market

    So are we gonna see defaulting mortgages in Europe?

    The only major difference I see are the lending standards. UK prime mortgages posses still safe guarantee, but the non-conforming part of the mortgage market is very close to the poor lending standards in US. Spain mortgages are usually pretty fine guaranteed, with sufficient requirements.

    Despite so many similarities, I suppose that Europe has quite good chance to avoid big jumps in delinquencies.
  2. I dont even know how people can buy homes there. The average home price in england/ireland is about £200,000 pounds (almost 400,000 dollars) Thats the average for the whole country!! Although min wage there is £5.52 per hour (or 11 dollars) thats hardly enough to afford anything. I know they do have something over there call council housing where i guess the government pays some of your rent and the government over there owns something like 1/5 of the countries houses and rent them out to people that cant afford to buy homes. This is probably why you wont see much of a decrease in home prices there because the government will buy the houses, rent them out for 50 years and sell them later when there is some appreciation i guess.

    I imagine home prices would not go down if the government here started buying peoples homes and renting them out for cheap prices to the people that lost those same homes.

    Picture this...average home prices in jan 2006 were what? 300k? imagine that uncle sam spent that 200 billion dollars they have injected into the banks(each month) and just bought the $300k houses that people couldnt afford anymore and then rented them out for $800 per month to these same families. They could buy 666,666 houses with that money and make about 6.3 billion per year for every 200 billion spent. Thats just over a 3% return on their money, and what is the Fed rate at now? 2 1/4%? Looks like they wouldve made more buy just buying those houses and renting them and wait for wages to catch up to housing (which might happen in 5 to 10 years) and they can get rid of the houses....then no financial crisis.

    I guess the word socialism is still a scary word to the US government.
  3. Spain has already had serious declines in RE, and its just starting in the UK.

    I don't think they had the risky loans to the extent that the US did however, so I doubt you'll see foreclosures anywhere close to those here. Declining values don't hurt so much if you don't have to refi the thing.
  4. Most of the European home purchases even in the markets that have had dramactic price increases have been more conservatively financed -- much lower loan to value limits with, obviously, much higher % as a down payment.

    The glaring exception is the UK. Some of the big mortgage players -- including NorthernRock financed 115% loan to value on the theory that the family with a new home needed furniture. The insanity of it boogles the mind.

    I'm not sure how many American's realize the magnitude of the NorthernRock bailout. The UK government is in for $105 BILLION DOLLARS. The UK is not even 25% the size of the US in population and financial capacity. Their bailout of NR is the equivilant of a $400 Billion Dollar bailout here. And now the government owns the entire institution.

    Although The US and the UK are the most highly leveraged the entire world financial system has simply borrowed tons of money short term to finance long term paper. The only reason the borrow short lend long equation works is that the leverage has traditionally been capped at around 12 or 15 to 1. When that ratio jumps past 20 to 1 and the to 30 to 1 the validity of the business model falls apart.
  5. Chagi


    Also worth asking another question - what about Canada?
  6. amiga


    Ah, I haven't heard about the renting houses owned by government. Hm, yes, it's really possible to use it for avoiding foreclosures. However, I suppose, it must be done in smaller extent otherwise the borrowers get used to it and would get into more risky mortgages later. I'm wondering whether UK ever used it in history to help the market, hm.

    Maybe now, when UK GDP is declining a bit, higher government spending would boost the GDP upwards in short term and therefore the government won't be against buying of the houses close to foreclosure.
  7. amiga


    Yes, I also think so.

    Just I want to ask, to understand the mortgage market better. Why people would need to refinance? I think in current circumstances people are going to avoid it. Although the base rate was cut in UK, still the house price decline will cause not very good conditions for refinancing. Or? Can there be something forcing them to refinance anyway?
  8. amiga


    I can't sleep for the terrible affordability!

    I printed out few charts showing affordability, delinquencies, house prices for UK and Spain. See attached pdf.

    Affordability is so extremely tight, that maybe for first time in history we may see the delinquencies increasing despite growing economy. Until recently I would expect first increasing unemployment rate, dropping real incomes, recession etc. for having rising delinquencies. But for this crisis I am not 100% sure. Affordability is so extreme.

    Chagi: I haven't looked on Canada yet.
  9. Siwash


    Western Canada with the exception of manitoba is slated to grow by approx. 2-3% this year, housing pricies are stable,not running up as previous years, The $100 Billion slated to be spent in the Alberta Oilsands this year will continue to trickle through to BC and Sask.

    Ontario with it's economy tied to the US mkt via manufacturing is likely heading into recession. I can't comment on the housing mkt there,Quebec is likely to suffer the same fate, but it also seems to be somewhat insulated. The maratimes are the maratimes, great people but no hope other than mining and some small refinery projects.

    Just my 2 cents, but I think Western Canada is the only region in NA that will continue to grow over the next 5 yrs.

    Hope this helps...
  10. Amiga, the reason why so many in the US were (are) forced to refinance is that many took out ARM's (adjustable rate mortgages) that only have really low rates locked in for a few years. When prices are rising, it is easy to get financing over and over again every few years, and keep your payments artificially low. This was one of the major driving forces behind the RE bubble here.

    Expensive regions almost made ARM's mandatory because regular folk could not afford the homes once they rocketed much faster than incomes. It is not strange to have someone here buy a home 10 times their annual gross salary (should be no more than 3 times). This is OK if rates stay low, and financing is available. Well, guess what happened? It amazes me that people could be so stupid to purchase an ARM in the first place, unless they knew they had sufficient resources to pay higher rates down the road. Lots of wealthy people did this, and no problem. They got low rates for several years. Many millions (yes millions) of people are not so lucky (or very smart either).

    #10     Apr 7, 2008