History > 2007 > UK > Economy (IV)

Review of the year

From the sub-prime to the ridiculous:

how $100bn vanished

Mighty institutions and powerful figures
undermined by pitiful little property deals

Monday December 31 2007
The Guardian
David Teather

It began with low-income Americans being encouraged to borrow mortgages they couldn't afford.

The economic butterfly effect would eventually cause deals worth billions of dollars to fall apart; the first run on a British bank in 140 years; some of the most powerful figures on Wall Street losing their jobs; wild gyrations on the markets; and dire warnings that the world is on the brink of recession.

At the start of the year, stockmarkets were at six-year highs and £40bn worth of mergers and takeovers were awaiting completion. Private equity firms and hedge funds were gorging themselves on cheap money and a handful of secretive, hugely wealthy individuals were becoming increasingly influential. But it was the millions on more modest incomes who would ultimately shape the events of 2007.

As the US housing market cooled and interest rates rose, many on the bottom rungs of the economic ladder found it difficult to meet their monthly mortgage repayments.

The first real concerns about sub-prime mortgages emerged at the end of February, when Wall Street suffered its worst day since the terrorist attacks of 2001. By April one of the biggest sub-prime mortgage lenders in the US had gone bankrupt and there was talk of a full-blown crisis. Credit more broadly began to dry up as lenders became nervous.

Fear also spread as it became clear that much of the bad debt had been packaged up and sold on around the world's financial system. Nobody, not even the banks themselves, knew who owned the toxic debt.

Some otherwise arcane practices of the financial world such as collateralised debt obligations and structured investment vehicles suddenly became everybody's concern.

The flood of private equity money turned into a trickle as it became more difficult to borrow, derailing deals including an attempt to buy J Sainsbury and, at the close of the year, an attempt by Lord Harris to take Carpetright private. Hedge funds too, which rely on leveraging their funds, have had their wings clipped.

The credit crunch was behind the biggest story of the year, Northern Rock. It emerged in September that the bank had been forced to apply to the Bank of England for emergency funds as liquidity had dried up in the market. Savers were told not to panic. But they did anyway. The next day, there were long lines of people threading through high streets across Britain, hoping to retrieve their cash.

The scenes triggered a postmortem into how a major bank - the fifth biggest provider of mortgages in the country - could reach the brink of collapse without any apparent action to prevent it from going under.

The inquest has so far given us the phrase "moral hazard" from the governor of the Bank of England, Mervyn King, who believed it was outside his remit to rescue a bank that had got into difficulties through risky borrowing on international money markets. It has also given us the sight of MPs from the Treasury select committee grappling to discover who from the much lauded tripartite structure of regulation for the UK financial system - the Bank of England, the Treasury and the Financial Services Authority - was to blame for the fiasco.

But it has not given us any definitive answers save that Northern Rock should not have risked so much on such a finely calibrated business model and should have seen it coming.

King came under pressure to quit but no one from the tripartite system has fallen on their sword. Even the architect of the business model, Northern Rock's chief executive Adam Applegarth, hung on until the middle of November when he finally resigned.

The stricken bank has received £25bn of taxpayers' cash. There are still two potential bidders - Sir Richard Branson's Virgin and the Olivant vehicle led by former Abbey National boss Luqman Arnold. Other options include nationalisation or a carve-up among high street banks.

As the mortgage crisis spread, Wall Street bosses began dropping like neatly lined-up dominoes. Stan O'Neal was forced out at Merrill Lynch and Charles Prince was ousted from the world's largest banking group, Citigroup. The most powerful woman on Wall Street, Zoe Cruz, lost her job at Morgan Stanley when the bank recorded losses of $3.7bn. Another Wall Street bank, Bear Stearns, suffered the first loss in its 84-year history.

The numbers just kept getting bigger. This month the Swiss bank UBS wrote off a further $10bn of sub-prime loans, on top of $3.4bn already announced. Two days later the Bank of England joined other central banks in pouring £50bn into the financial markets in the hope of staving off a meltdown. A succession of Wall Street banks have turned to sovereign funds in China, Singapore and the Middle East for injections of cash. The unravelling of events has been a stunning example of how interdependent the world economy has become.

Confidence appears to be ebbing. Retailers in Britain were forced to slash prices before Christmas to shift stock. According to the Royal Institute of Chartered Surveyors, house prices in Britain are falling at their fastest rate in two years. The outlook for jobs is the worst for a decade. Jon Hunt, who sold the estate agency Foxtons in April, may, it turns out, have called the top of the market.

In numbers

$99.29

The oil price reaches its peak just short of $100 a barrel (November 21)

$2

The pound hits $2 for the first time since 1992 (April 16)

£1.1bn

Price HSBC receives selling its headquarters in Canary Wharf (April 30)

$100bn

Ben Bernanke's estimate of total sub-prime losses (July 19)

From the sub-prime to the ridiculous: how $100bn vanished, G, 31.12.2007, https://www.theguardian.com/business/2007/dec/31/
subprimecrisis.creditcrunch

Grim Brown

warns of a bleak year for Britain

· Prepare for turbulence to come, says PM
· Credit crunch 'our biggest challenge'

Sunday December 30, 2007
The Observer
Nicholas Watt, political editor

Gordon Brown today issues a bleak assessment of the world economy as he braces Britain for a year of belt tightening in the wake of the credit crunch.

In a strong warning, which sets the backdrop for a campaign to revive his premiership, Brown tells Britain to prepare for 'global financial turbulence' in 2008. 'Our strong economy is the foundation,' Brown writes in his new year message. 'With unbending determination in 2008, we will steer a course of stability through global financial turbulence. The global credit problem that started in America is now the most immediate challenge for every economy.'

Brown's sober analysis comes in the wake of the autumn credit crunch that caused the first run on a British bank in more than a century after the Bank of England bailed out Northern Rock. The sight of thousands of depositors queuing outside branches across Britain to withdraw their savings was one of the factors that contributed to the dramatic fall in Brown's ratings in the autumn.

The Prime Minister knows he must turn round his and his government's fortunes in 2008 if he is to beat off a strong challenge from Conservative leader David Cameron and place Labour in a strong position to secure a fourth successive election victory. Jack Straw, the Justice Secretary, today warns that Tory messages are 'resonating' with voters.

But Brown receives a boost today as a new opinion poll shows that a 13-point Tory lead has shrunk to five points in just two weeks. In a YouGov poll for the Sunday Times, Labour is up three points on 35 per cent, the Tories are down five points on 40 per cent and the Lib Dems gain a point to 15 per cent. Downing Street, which believes that coping with the expected economic slowdown will be a decisive factor in the new year, will be encouraged by these results.

The Prime Minister tackles the financial threat head-on in his message as he pledges to repeat his success as Chancellor, when he helped to stave off recession in the face of a series of global economic crises. 'Just as we withstood the Asia crisis, the American recession, the end of the IT bubble and the trebling of oil prices and continued to grow, Britain will meet and master this new challenge by our determination to maintain stability and low inflation,' he writes.

'We will make the right decisions, not only this year but for the years ahead, to safeguard and strengthen our economy - and, by keeping inflation low, keep interest rates for business and homeowners low.'

Brown's decision to highlight the threat to the economy shows he still believes his track record places him in a strong position to cope with financial instability, despite recent polls that show the Tories closing the gap when judged on economic competence. But Brown also wants to brace people for a bumpy year. He says that '2008 will be the decisive year of this decade to put in place the long-term changes that will prepare us for the decades ahead'.

Brown indicates that ministers will soon embrace a new generation of nuclear power stations. The government believes that renewing Britain's civil nuclear power programme is the most effective way of guaranteeing security of supply while tackling climate change. 'Because a good environment is good economics, we will take the difficult decisions on energy security - on nuclear power and renewables - so British invention and innovation can claim new markets for new technologies and create hundreds of thousands of new jobs.'

Aides described the message as strongly New Labour. He makes clear that Labour traditionalists will receive no comfort as he presses ahead with the reform of public services to better tailor them to the individual. 'Illness is not a nine-to-five condition - and the NHS cannot be just a nine-to-five service,' he writes. This will be welcomed by supporters of Tony Blair who signal today that they are suing for peace with Brown as they declare that their hero is 'history' as a political figure in Britain.

In an article in today's Observer, the former cabinet minister Stephen Byers writes: 'Tony Blair is history. With Tony Blair gone from domestic politics, the task of leading Labour to victory falls to Gordon Brown. It is the responsibility of all of us who want to see a fourth election victory to give him our support.'

David Cameron also issues his new year message, pledging to set out a 'clear and inspiring vision' of what a Conservative government would look like. Highlighting health, education, crime and social breakdown as the key issues, he writes: 'This will be the year in which we show that there is hope for the future, that there is a clear and credible alternative to this hopeless and incompetent Labour government.'

Grim Brown warns of a bleak year for Britain, O, 30.12.2007, http://observer.guardian.co.uk/politics/story/0,,2233303,00.html

House prices fall for a second month

Index shows 0.5% slip this month,
4.8% rise for year

Nationwide predicts prices will be static in 2008

Saturday December 29 2007
The Guardian,
Angela Balakrishnan

Annual house price growth in the UK ended 2007 at nearly half the rate seen at the start of the year. The Nationwide house price index fell for the second successive month - by 0.5% after a 0.8% decrease in November.

The figures provide yet another sign that Britain's property market is running out of steam as higher interest rates and stricter lending conditions tighten their grip on buyers' purses.

The three-month rate of growth, which is widely regarded as a better guide to the market than monthly figures, showed a slowdown to 0.9% from 1.4% last month.

Annual house price inflation has fallen to 4.8% after entering January at 9.3% and reaching a peak of 11.1% in June. This is the lowest yearly rate of growth since May 2006. The average cost of a property in the UK stands at £182,080 - £8,334 higher than at the end of last year.

Fionnuala Earley, chief economist at Nationwide, said: "The housing market has weakened significantly in the closing months of 2007 after holding up more strongly than expected in the earlier part of the year."

The mortgage lender had predicted a surge in prices of between 5% and 8% this year, with double-digit growth in the first half of the year giving way to lower increases in later months. Though yesterday's figures were broadly in line with its forecasts, Nationwide said the path to this point had been unexpected.

"Most indicators now show that demand is responding to the pressures of weak affordability, past increases in interest rates and the lower house price expectations that we had expected to take hold earlier in the year," said Earley.

"However, the turmoil in the financial markets resulting from the US sub-prime mortgage issue and the problems experienced by a UK mortgage bank have swiftly added to the pace of changing sentiment," she said.

Nationwide predicts that house prices will remain static next year but said the shape of the market would mostly depend on how the credit crisis played out.

Evidence that the UK economy is starting to cool and recent minutes from the Bank of England's monetary policy committee suggest that borrowing costs may be brought down at least twice next year. But Earley said this would stabilise rather than reignite the housing market.

"It seems unlikely that there will be a big recovery in activity and prices, mirroring the 2005 experience. This is mainly because housing affordability is starting from a much worse position than in 2005, while interest rate cuts have started from a higher and more restrictive level."

Nationwide's figures follow news this week from the British Bankers' Association that the number of mortgages approved for house purchases dropped last month, suggesting more price falls to come in the new year.

Howard Archer, economist at Global Insight, predicts that prices will fall by 3% next year.

"The rising risk that the housing market could be headed for a sharp correction maintains pressure on the Bank of England to trim interest rates again early in 2008," he said.

    House prices fall for a second month, G, 29.12.2007, http://www.guardian.co.uk/money/2007/dec/29/houseprices.housingmarket

Credit crunch?

What credit crunch?

UK spends like there's no tomorrow

Frenzied activity at the sales
despite gloomy economic forecasts

Saturday December 29 2007
The Guardian
Matthew Taylor

The credit crunch and dire predictions of job losses and a new year economic slowdown seemed to have little effect on bargain hunters yesterday as shops across the country reported no let-up in the frenzied pace of sales.

The rush, which started on Christmas Day, when armchair shoppers spent £84m online, continued with thousands of people joining the singer Lily Allen for the opening of the Harrods sale in central London.

Earlier, the Lakeside shopping centre in Essex said the number of people through its doors was up 29% this year, with the House of Fraser tills ringing up £1,000 a minute in the first hour of trading. A similar picture emerged at the Trafford centre in Manchester, where about 500 people queued for the start of the Next sale.

But the battle to find a bargain was not without its casualties. Ambulance crews were called to shopping centres in the West Midlands after two shoppers collapsed and another woman, in her 20s, suffered a hand injury when she became trapped in a door on her way to the shelves at Fort shopping centre in Birmingham.

On Wednesday - the busiest shopping day of the year - high street sales peaked 45 minutes after the shops opened as the first customers reached the tills. John Lewis reported average sales of £1,000 a minute and double that figure during the morning peak.

A spokesman said that sales had increased by up to 11% on the previous year in some branches. Brent Cross shopping centre estimated that 150,000 shoppers had passed through its doors, collectively spending up to £50,000 an hour.

In the West End of London there was an 8% increase in Boxing Day shoppers compared with last year, with Bond Street seeing a surge in shoppers of 13%.

The frenzied activity comes amid gloomy economic forecasts. The Chartered Institute of Personnel and Development says the UK economy is at its weakest for a decade, with unemployment predicted to rise by about 150,000 to 1.8 million next year. The institute said the next year would be "easily the worst since the Labour government came to power in 1997".

However, for the thousands who had queued for the start of the Harrods sale yesterday, the dire predictions seemed to have had little impact. "It has been an extremely good start for us," said spokesman Peter Willasey. "At our peak today we were taking about £15,000 a minute - or about £880,000 an hour - and we have been up hour on hour throughout the day."

Allen, dressed in a black, backless, sequinned gown, was met by Mohamed Al Fayed to a frenzy of cheers from the crowd.

Robert Browne, 29, from south London, first in the queue having waited outside since 11.30 the previous night, was in no mood to be distracted. He said: "I'm after a plasma TV. As soon as the doors open I am going to be straight up to the first floor. I'm looking for a really good price - at least 50% off."

Sales bargains, online and in-store

From the modest to the grand, some of the best bargains still out there for sale shoppers online and on the high street:

Sopranos complete series 1 box set

HMV:

Was £59.99

Now £17.99

Harry Potter and the Order of the Phoenix game for Wii

Play.com - online:

Was £39.99

Now £24.99

Doctor Who Time Travels

WH Smith:

RRP £17.99

Now £10.25

On Chesil Beach, by Ian McEwan

Waterstone's:

Was £6.99

Now £3.49

The Kite Runner, by Khaled Hosseini

Waterstone's:

Was £7.99

Now £3.99

Reebok Fusion Treadmill

Argos:

Was £999.99

Now £499.99

Women's mountain bike

Halfords:

Was £259.99

Now £119.99

Ottori double bed

Habitat:

Was £1,099.00

Now £879.00

Albany wallpaper, paprika/sage stripe

Laura Ashley:

Was £14 a roll

Now £7 a roll

42inch HD-ready digital LCD TV

Dixons:

Was £1,299.98

Now £999.99

Samsung digital camera

Currys:

Was £199.99

Now £79

Portable Ipod speakers

Tesco:

Were £99.76

Now £49.88

Conduit dining table

Heal's London:

Was £1,115

Now £400

Check walnut extending table

Heal's Manchester:

Was £1,439

Now £715

Marc Jacob metallic patchwork Stam handbag

Net-a-porter.com:

Was £970

Now £679

Black Miu Miu men's suit

Harrods:

Was £549

Now £269

Leather jacket

Emporio Armani,

Brompton Road, London:

Was £729

Now £437

Three-tone lace up Yves St Laurent boots

Browns, London

Were £590

Now £340

Wool and mohair scarf

Harvey Nichols:

Was £165

Now £99.00

Gold sequined dress

Alexander McQueen,

Bond Street, London:

Was £6,905

Now £3,455

    Credit crunch? What credit crunch? UK spends like there's no tomorrow, G, 29.12.2007, http://www.guardian.co.uk/money/2007/dec/29/retail.highstreetretailers

House price growth

falls to a 19-month low

December 28, 2007
From Times Online
Rosie Lavan

Nationwide says rate cuts unlikely to lift market, as UK economic fears grow amid worst jobs outlook for a decade

House price inflation fell to a 19-month low of 4.8 per cent in December according to the latest figures from Nationwide building society. In June prices were rising at an annual rate of 11.1 per cent.

Nationwide warned today that the market had fallen so sharply that further interest rate cuts would do more to stabilise the market than lift it.

Fionnuala Earley, chief economist at Nationwide, said: "It is true that lower interest rates will probably help market activity recover somewhat later in 2008, as lower house price growth restores some affordability and allows pent-up demand from first-time buyers to be released...but these will do more to stabilise the market than re-ignite it."

The average price of a home dropped 0.5 per cent to £182,080 in December, following a 0.8 per cent decline last month. This took the annual rate of house price inflation to 4.8 per cent, compared with 6.9 per cent in November and 11.1 per cent in June.

House price inflation has not been under 5 per cent since the spring of 2006.

The continuing unrest in the credit markets following the fallout from the sub-prime crisis in the US and the damage to confidence after the collapse of Northern Rock have all exerted pressures on the property market.

Ms Earley said: "The turmoil in the financial markets resulting from the US sub-prime mortgage issue and the problems experienced by a UK mortgage bank have swiftly added to the pace of changing sentiment in latter months."

Howard Archer, chief economist at Global Insight, said the real concern for the property market lay in the stability of the wider economy. He said he is now expecting house prices to fall 3 per cent next year. He had thought they would remain flat.

Mr Arhcer said: "There is undeniably a very real - and growing danger - that the housing market could see a sharp correction next year. Probably the biggest risk is that the economy slows sharply over the coming months and unemployment starts rising significantly."

His warning comes as The Chartered Institute of Personnel and Development said unemployment next year will rise to its highest level since 1997 as the credit crisis takes its toll on the real economy.

The Institute forecast unemployment will rise by 150,000 next year to 1.8 million, its highest since Labour came to power. The number of people in work will edge up just 0.25 per cent or 75,000 in the year to December 2008, a third of the figure for the last two years.

Meanwhile KPMG, the accounting firm, predicts that a record total of more than 130,000 people are likely to declare themselves bankrupt or enter individual voluntary arrangements in 2008. This compares with 111,000 becoming insolvent in the 12 months to September this year.

Figures from the British Bankers Association (BBA) yesterday showed that the number of mortgages approved by lenders in November fell 43 per cent compared with the same month a year ago.

    House price growth falls to a 19-month low, Ts Online, 28.12.2007, http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3103128.ece

The $4bn killing

Published: 15 December 2007
The Independent
By Stephen Foley in New York

House prices are crumbling on both sides of the Atlantic, growing numbers of homeowners face repossession, financial markets are yo-yoing and the UK saw its first run on a bank in living memory. But for three audacious New York traders it all added up to a $4bn (£2bn) profit opportunity and the biggest jackpot in the history of Wall Street.

The young guns at the investment bank Goldman Sachs – none of them over 40 years old – were unmasked yesterday, prompting a wave of adulation and envy among their colleagues, and another bout of handwringing about Wall Street's ability to make multibillion-dollar profits even as millions of ordinary people face losing their homes.

Dan Sparks and two underlings, Josh Birnbaum and Michael "Swenny" Swenson, placed what were in effect giant bets against the US mortgage market at the start of the year and watched their winnings tick higher and higher as the rising numbers of mortgage defaults spiralled into a worldwide financial crisis. Throughout the year, they battled with more cautious bosses who feared the bets were too big and too dangerous, but in part because of their success Goldman Sachs will post record profits next week. In doing so, the firm will stand alone on Wall Street, where rivals have suffered huge losses from the credit market meltdown.

The trio themselves are in line for bonuses of about $10m apiece from a record bonus pool at Goldman of about $19bn. "They are very embarrassed that their names have come out," said a company source. "Until now, nobody had heard of them, including most of the people on the floor where they work."

The Wall Street Journal, the bible of the New York finance industry, revealed yesterday how the three men would forgo lunch breaks, weekend trips with their families and even sleep to keep on top of positions – but would always find time to pump themselves up at the gym before heading to the testosterone-fuelled trading desk.

Haunted by the spectre of Nick Leeson, whose unapproved trading racked up the £827m losses that sank Barings Bank in 1995, investment banks have tried to keep a tight leash on their traders, but Goldman Sachs has led a trend to put more and more of the bank's own money on the line in the search for bigger profits. Nonetheless, the trio had to engage in a running battle to keep their bets from being whittled away by more conservative risk managers, and at one point in February when an angry Mr Birnbaum shouted that it was "the wrong time" to be cutting the bets, he was overruled. The decision was reversed and the bets ratcheted back up later in the year.

Their $4bn success more than mitigated other losses on mortgages, and could put the three men into an elite group of legendary traders. Their profit eclipses the $1.1bn made by George Soros when his bets against the currency pushed sterling out of the exchange rate mechanism in 1992 and the estimated $1.5bn made by the hedge fund manager John Arnold last year from the collapse of a rival fund, Amaranth.

Goldman is one of the oldest and certainly the most illustrious firms on Wall Street, with a reputation for hiring athletes and military veterans – people who do not necessarily seek the limelight, and are able to be "team players". Wall Street bloggers were yesterday sniping that the revelations about the three traders at the heart of the bank's mortgage market bets had much to do with jockeying for favour as the bonus pool is divvied up.

Goldman itself is trying to play down the scale of the risks taken by the mortgage trading desk, saying that most of the trades were designed to reduce the risk of opposite holdings elsewhere in the business. The plans were being carefully directed from above, a company spokesman said. "These guys were the pilots flying the planes." The bank has also been trying to limit the political fallout from revelations that it made giant profits from a financial crisis that could see millions of Americans forced out of their homes and plunge the rest of the economy into a recession. Chris Dodd, a candidate for the Democratic party presidential nomination and head of the Senate's banking committee, has threatened to investigate Goldman's behaviour.

Wall Street banks have been fingered as a major cause of the credit crisis because of their insatiable demand for mortgages, which they buy and repackage into a dizzying array of complex financial instruments.

Goldman's traders positioned themselves for a crash by betting against some of those instruments – even while other parts of the mortgage business spent the first half of the year creating and selling new ones to hungry investors. Meanwhile, independent mortgage brokers were pushing unsuitable loans on to low-income Americans who may not now be able to pay them back.

Mr Dodd said he was concerned because it appeared that Goldman Sachs was "aggressively pushing sub-prime mortgages that they knew to be of concern while simultaneously shorting "mortgage derivatives".

And he has turned his fire on Hank Paulson, President George Bush's Treasury Secretary, who was head of Goldman Sachs until being persuaded to join the administration last year. Mr Paulson is in the awkward position of seeing his Goldman Sachs shares rise in value while having to organise a bail-out for American homeowners who cannot afford their mortgages.

Critics argue that Goldman's aggressive bets against the mortgage market have exacerbated problems in the financial markets, which in turn has made it impossible for many struggling borrowers to refinance.

What at the start of the year had appeared to be a serious but isolated problem for over-extended American homeowners has spiralled into a global financial crisis. The world's central banks this week unveiled a $100bn package of emergency measures to try to get the markets moving again.

The mortgage derivatives created by Goldman and others have been dubbed "toxic waste" by investors, who no longer want to buy them. Wall Street banks have suffered more than $50bn in losses as a result and have dramatically scaled back their activities, causing financial markets to freeze up. Smaller banks such as Northern Rock in the UK, which relied on the markets for funding, have got into trouble and many other sorts of business are threatening to scale back investment plans, which economists fear could lead to rising unemployment.

Agony on Main Street, ecstasy on Wall Street

Dan Sparks, 40

Those who get on at Goldman Sachs are those who can leap on a fleeting opportunity – a talent that Sparks exudes in his personal life, too. He bumped into a childhood schoolfriend in the street on a shopping trip to New York, invited her for dinner that evening and is now married with two children.

The long-time bond trader was promoted to head of Goldman Sachs' mortgage business a year ago, since when he has had a little less time for weekend trips to his alma mater, the University of Texas A&M, where he and his family are obsessive supporters of the American football team and donors to the athletics department.

Michael "Swenny" Swenson, 40

With no time to break for lunch, Swenson would order the same chicken and vegetable salad from a nearby deli and eat it at the trading desk every day. Nicknamed Swenny – everyone has a nickname on a matey Wall Street trading desk – the seven-year Goldman Sachs veteran entertains colleagues with a fast, biting wit.

At Williams College, Swenson was an ace hockey player and continues to visit the gym every morning,despite having to commute from the suburbs of northern New Jersey to downtown Manhattan in time to be at the desk by 7.30am. He has four children.

Josh Birnbaum, 35

In the Hamptons, Wall Streeters' exclusive summer getaway, Birnbaum has been something of a hot property. A local magazine last summer named him as one of the area's most eligible bachelors, a "power player" and a "well-mannered Mr Right". The profile also had him down as a "brainiac", and it true that he was the technical brains behind the trio's ability to place efficient bets against what are still obscure and difficult-to-trade mortgage derivatives. Swenson and Sparks wanted him to create a computer model for trading against a new mortgage index, and he netted $1m on his first day.

The big bets that came off...

George Soros made £550m on black wednesday, 1992

Soros studied at the London School of Economics in the 1950s, forming the view that economic growth was reliant on a tolerant and market-oriented society. He put that theory into devastating practice when Britain was forced to leave the exchange rate mechanism (ERM) on 16 September 1992.

Soros realised that the pound had been overvalued against the deutschmark when it joined the ERM and borrowed vast sums of sterling to convert into deutschmarks and French francs. When the inevitable devaluation came along, he sold his position, paid back his borrowings of about £10bn and pocketed a £550m profit – earning the sobriquet "The Man Who Broke the Bank of England".

Warren Buffett made £1bn on currencies since 2002

The famously frugal investor, who still lives in the house he bought in 1958 for $31,500, has a history of successful financial gambles. In 2002 he began buying contracts to deliver US dollars against other currencies – in effect betting on the fall in value of the dollar. The move surprised fellow investors, not least because Buffett had never before made an investment based on the movements of a currency. It has paid off handsomely, netting his company an estimated $2bn in profits. Buffett also trades on his reputation. In 1998 he started buying huge quantities of silver. Investors followed his lead, raising the price and earning Buffett a handsome profit.
 

Paul Tudor Jones made £50m from crash of 1987

Early in 1987, a young New York trader made a documentary predicting that the world's financial markets were grossly overvalued and a dramatic crash was inevitable. When Black Monday arrived on 19 October, causing the biggest single drop in stock markets ever seen in a single day, Paul Tudor Jones was feted as a soothsayer. His advice to his clients to sell their shares earned him a $100m pay cheque. Those feeling bullish about the current economic circumstances may do well to listen to the latest predictions by Robert Prechter, who influenced Jones's 1987 forecast. Prechter said recently that stocks are overvalued beyond the level that led to the Great Depression.

...and the ones that came a cropper

John Meriwether lost £2.3bn in 1998 financial crisis

Regarded as a genius in complex trades involving government bonds, Meriwether's hedge fund, LTCM, was a star performer in the first years of its existence, regularly making returns of more than 40 per cent. But as LTCM ran out of bonds to use for its impressive returns, it began to make investments in areas outside its expertise. When stock markets fell in south-east Asia in 1997 and Russia in 1998, investors started selling the government bonds that were the bedrock of LTCM's wealth. In a single month its equity fell from $2.3bn to $600m. By 1998, the Federal Reserve organised a $3.6bn bail-out to avoid a wider collapse in the markets. Total losses eventually reached $4.6bn.

Yasuo Hamanaka lost £1.5bn on copper trades in 1996

Copper trader Hamanaka was known as "Mr Five Per cent" in reference to the proportion of the world's annual supply of the metal that he controlled. For years he was allowed to dictate his company's copper-buying strategy, but he was running two accounts – one showing healthy profits and another huge losses. The deficit came to light in 1996 when the authorities in London and New York asked his employer, Sumitomo, to cooperate with an investigation into suspected price-fixing. Panic ensued and Sumitomo was forced to admit that Hamanaka had lost $1.8bn in unauthorised trading. Eventually the losses reached $2.6bn. Hamanaka was jailed for eight years.

Nick Leeson lost £827m at Barings Bank in 1995

In 1992, Leeson's employers had good reason to value his services. After a series of speculative trades on the Singapore currency exchange, he made the company £10m – a tenth of its total profits.

Soon, Leeson's luck changed. By the end of 1994, the deficit had reached £208m and on 16 January 1995, Leeson decided to place a huge bet on the Tokyo stock exchange going up. Overnight the Kobe earthquake struck and the exchange sank.

He tried to recoup his losses by betting again but this, too, failed. Leeson fled, leaving a note saying "I'm sorry". Barings collapsed as a result of his losses, and Leeson was eventually sentenced to six and a half years in prison in Singapore.

    The $4bn killing, I, 15.12.2007, http://news.independent.co.uk/business/news/article3253066.ece

Banks act on meltdown fear

· Joint move by UK, US, Swiss, Europeans and Canadians
· Unprecedented action to ease global credit crisis
· £50bn injection includes £10bn by Bank of England

Thursday December 13 2007
The Guardian
Larry Elliott, Ashley Seager and Jill Treanor
 

The Bank of England joined four other big central banks around the world yesterday in emergency action that will see £50bn injected in to the world money markets in a move designed to prevent the worsening credit crunch derailing the world economy.

In an unprecedented move, which the City said revealed how serious the problems in financial markets had become, central banks offered huge sums of money to commercial banks in an attempt to get them to start lending to each other again.

Speaking to the Guardian, the chancellor, Alistair Darling, welcomed the move: "This was both necessary and very welcome. It sends a very clear signal across the world that central banks stand ready to do whatever is necessary."

Darling has been in constant touch with the Bank's governor, Mervyn King, in recent weeks as it became apparent that the freezing up of credit markets responsible for bringing down Northern Rock seemed to be getting worse, not better.

The government is already braced for the UK economy to slow to around 2% next year, but has become increasingly concerned in recent weeks that Britain's 15-year period of uninterrupted economic growth would be threatened by a prolonged crisis in financial markets.

Although yesterday's initiative was agreed internationally, it comes at a crucial time for Gordon Brown, who is relying on a strong economy to regain the political initiative after a troubled autumn for the government that has seen a series of problems pile up since plans for a snap November poll were aborted.

Ministers are hopeful that more benign financial markets will enable them to end the damaging saga of Northern Rock and restore faith in Labour's reputation for economic competence - seen as vital if the government is to win a fourth election.

Preparations for the intervention began three weeks ago in Cape Town when central bankers and finance ministers from the world's top 20 economies gathered for a routine meeting. But evidence that an improvement in market conditions in October was proving short-lived prompted them to discuss concerted action.

With a daily worsening of conditions in the credit markets over the past week prompting increasingly loud demands by commercial banks for action, central bankers have been in constant touch to discuss the timing and details of a rescue plan.

At 2pm London time yesterday, the five central banks, including the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Canada, simultaneously announced measures, tailored to the needs of their own markets, to flood money markets with funds in various ways.

The Bank of England said it would offer £10bn of three-month funds on December 18 and again on January 15 and stood ready to do so again if its actions did not free up money markets. Threadneedle Street said it would accept a wide range of high-quality collateral if commercial banks wanted to take advantage of yesterday's offer.

Britain's biggest banks have been pressing for this sort of action from the Bank ever since the crisis blew up in August, but Threadneedle Street was adamant last night that it had not made a U-turn.

"This coordinated set of actions is in response to pressures in inter-bank markets which have increased in recent weeks, reflecting sentiment about the global financial sector," said a Bank spokesman. "These actions demonstrate that central banks are working together to try to forestall any prospective sharp tightening in credit conditions."

Banks have been reluctant to carry out their normal lending to each other as they sought to cover losses they may have suffered from the US sub-prime mortgage crisis. Over the past few weeks, credit has become even scarcer as banks have hoarded cash in order to balance their books for the end of the year.

The seizing up of credit markets has made borrowing more expensive for individuals and banks, and forced the Bank of England last week to cut interest rates for the first time in two years. Despite inflation concerns, the Bank was worried that the credit crunch was starting to affect the whole economy, particularly the housing markets. Analysts expect it may cut rates several more times next year.

Darling said central banks stood ready to act again. "Most people believe this will take some time to work through," he said. But he warned the public not to become too worried as the economy remained strong and employment high.

"We have been growing faster than any other major economy and we are much better placed than many other countries, but there is no doubt that we are going through difficult times," he said.

In the City, analysts said the move was bigger and more coordinated than anything they could remember, including the aftermath of 9/11. "We warmly welcome today's move," said Philip Shaw, chief economist at Investec bank. "While there is no 'silver bullet' fix to credit markets' woes, this should provide much-needed liquidity and restore confidence."

Initially, stock markets reacted positively to the news, with the Dow Jones industrial average surging 200 points in early trading, but dealers later had second thoughts and markets finished only slightly up on the day.

"The [central banks] have gone out and constructed a great big turbo-charged plunger to flush out the clogged credit markets," said Stephen Stanley, analyst at Royal Bank of Scotland Greenwich Capital. "Will it work? I hope so. No one knows, but the simple fact of seeing that the world's central banks are serious about this will go a long way to bolstering psychology, and the extra cash won't hurt either."

    Banks act on meltdown fear, G, 13.12.2007, http://www.guardian.co.uk/business/2007/dec/13/bankofenglandgovernor.creditcrunch

10.15am

Jobless level 'lowest since 1975'

Wednesday December 12 2007
The Guardian
Larry Elliott,
economics editor Guardian Unlimited

The number of people out of work and claiming benefit in Britain fell to its lowest level in 32 years last month as more than 11,000 came off the dole, the government said today.

Unemployment figures released by the Office for National Statistics showed that the jobless total dropped by 11,100 to 813,000 - a level not seen since April 1975.

Despite the fall in unemployment, the ONS reported that wage pressures in the economy remained weak. Headline average earnings rose 4.0% on the year in the three months to October, easing from 4.1% in September and below forecasts for a rise of 4.2%.

The Bank of England is concerned that the fall in the jobless total will embolden wage bargainers to push for higher price increases to compensate for the rising cost of fuel and food,but today's figures showed no cause for Threadneedle Street to be alarmed.

Earnings growth in the manufacturing sector crumbled to 2.5% - a record low - as last year's bonus payments were not repeated.

    Jobless level 'lowest since 1975' , G, 12.12.2007, http://www.guardian.co.uk/business/2007/dec/12/economics

Pressure on Bank

as house prices fall


December 6, 2007
From The Times
Gary Duncan:
Economics Editor

House prices have tumbled for a third month in a row, with the average home now worth £5,000 less since August after the property market’s worst run of losses for more than a decade. The figures increased pressure on the Bank of England to cut interest rates today.

Confirmation from Halifax, the biggest mortgage lender, that the housing downturn is rapidly gathering pace, and more warning signs that the economy faces a painful slowdown, sent the City scrambling to bet on the Bank cutting rates today.

Pressure on the Bank has escalated in recent days as mounting nervousness among big financial institutions has threatened a fresh seizure in the City’s money markets. London’s big banking groups have been hoarding cash, driving up commercial loan costs and inflicting fresh damage to an already faltering economy.

City hopes that the Bank’s rate-setting Monetary Policy Committee (MPC) will act this morning to ease these stresses with lower borrowing costs leapt yesterday after a “double whammy” of bleak news over next year’s prospects.

The Halifax figures showing that average house prices in November fell by 1.1% - the sharpest monthly slump in for almost a year – coincided with evidence that conditions in the services sector - the engine room of the economy - have weakened to their worst in four-and-a-half years as fearful consumers curb their spending habits.

On the stock market, bluechip shares charged upwards as expectations mounted of a quarter-point cut in base rates from their present six-year high of 5.75 per cent.

Any cut will be greeted with relief by homeowners. Last month’s fall in property prices came on the heels of a 0.7 per cent drop in October and a 0.6 per cent decline in September. It marked the first time since 1995 that prices have fallen for three consecutive months.

House price inflation has collapsed from the double-digit pace that homeowners have grown used to, to just 6.3 per cent last month, amid economists’ predictions that it will slide close to zero, if not into negative territory, with year-on-year falls in property values, in coming months.

Fears over a severe economic downturn next year were stoked by more grim developments in the services sector, which has driven Britain’s economic growth for the past decade.

Two key surveys suggested that the robust growth enjoyed by services businesses from cinemas and restaurant groups to accounting and legal firms is now in serious danger of stalling.

Overall activity for services companies fell for a third month in a row last month to its weakest since May 2003, a closely-watched survey indicated. It suggested that conditions were worst for hotels and restaurants, and for financial groups, with both sectors shrinking during November.

The latest indication of households cutting their spending came just a day after a poll from the Nationwide Building Society showed their confidence falling at its sharpest rate in more than three years.

Pressure on the pound in Britons’ pockets was highlighted again as the British Retail Consortium said that food prices leapt last month, rising at their sharpest rate this year.

With the Bank of England wrestling today with its nagging worries over persistent inflationary pressures, however, the BRC’s evidence of continuing price pressures at the shops will do little to ease its dilemma over interest rates, economists said.

    Pressure on Bank as house prices fall, Ts, 6.12.2007, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3007303.ece

UK mortgage market

could face £30bn squeeze in 2008

December 5, 2007
From The Times
Gabriel Rozenberg,
Economics Reporter

Britain’s mortgage lenders face a £30 billion funding shortfall next year if the Bank of England does not step in to ease the credit squeeze, the industry’s lobby group said yesterday.

As much as a third of the £90 billion required to finance the demand for mortgage loans expected next year will need to come from money markets that effectively have been closed since August, the Council of Mortgage Lenders (CML) said.

But as the CML pleaded with the Bank to intervene to prevent a severe contraction in the availability of mortgages, banks were told to get their own house in order by the City’s regulator.

The Financial Services Authority (FSA) said that lending conditions could get worse and that lenders should forgo profits to protect themselves against a collapse in liquidity of the sort that crippled Northern Rock.

The stark warnings, presented yesterday at the CML’s annual conference in London, come at a time of deepening gloom over Britain’s mortgage market. New loans for house purchase are down by 31 per cent over the past year and all big surveys have shown house prices falling in recent months.

Funding stresses in the London money markets continue to mount. One-month sterling interest rates for loans between banks rose still further yesterday, after they leapt on Monday to a nine-year high, registering the sharpest gains for 13 years.

Michael Coogan, the director-general of the CML, said that the Bank of England needed to take the lead in restoring confidence by allowing a wider range of mortgage-backed assets to be posted as collateral against loans. He said: “It is not an arcane issue – this is an issue that could affect every consumer in the UK. If the markets don’t open up we will have a much smaller, less innovative mortgage market going forward.”

The Bank should also help to restore confidence in wholesale markets by cutting interest rates tomorrow, he added.

But Clive Briault, the head of retail markets at the FSA, said that banks should “assume that market conditions will remain very difficult for a sustained period”.

He urged them to ensure that they had adequate levels of liquidity, despite the higher costs involved at present. “But it would be prudent to pay a correspondingly high price – and to forgo some profits – to secure this protection, or otherwise to scale back balance-sheet growth,” he said.

Firms should carry out robust stress testing and examine what state they would be in if they had no or only limited access to wholesale funding for a sustained period, Mr Briault said. They should also make contingency plans for the worst outcomes.

He told lenders: “There is almost certainly more change to come. It is very unlikely that we will return to the conditions that prevailed before August . . . It is clear that some business models are no longer as economically viable as they used to be.”

Homeowners with high loan-to-value ratios on their mortgages will face heavy difficulties refinancing their loans next year and many will face unaffordable rates, he said, but banks should not forget their obligation to treat struggling customers fairly.

Mr Briault added that sub-prime borrowers might not have access to the market at any price until normal conditions returned.

The mood was darkened further by a research note from Morgan Stanley, the Wall Street bank, saying that it had removed Bradford & Bingley from its banking portfolio. “Our UK banks analysts suggest international investors should avoid UK banks at the moment, given the structural and systemic issues,” it read.

    UK mortgage market could face £30bn squeeze in 2008, Ts, 6.12.2007, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3001340.ece

Question of the Week:

should I sell my house now?

December 1, 2007
From The Times
Anne Ashworth

Why is the mood more pessimistic?

Blame it on a succession of downbeat surveys highlighting the extent of the market’s slowdown. Buyers’ confidence is subsiding under pressure from more expensive borrowing, although prices are still 7 per cent higher than a year ago. Land Registry data showed London prices falling by 0.6 per cent in October, although there was an overall rise in England and Wales of 0.1 per cent. Nationwide reported a 0.8 per cent decline in November, the largest fall since June 1995. Bank of England mortgage approval figures fell by a third in October.

This is all very sudden isn’t it?

No one should be surprised that the market’s previous giddy growth is stalling. This was widely forecast last Christmas as the inevitable consequence of the strain imposed on household budgets by higher interest rates, particularly for those whose discounted fixed rate mortgage deals were due to come to an end. It’s all about affordability: prices have risen faster than earnings for 11 of the past 12 years, according to Nationwide. Mortgage repayments now account for more than 51 per cent of the average first-time buyer’s take home pay. The market’s temperature cooled in parts of the North and Midlands in the spring.
 

Are we in for a crash?

Correction would probably be a more appropriate description. Stagnation-not slump - appears to lie ahead. No respected commentator currently believes there will be a repeat of the crash of the late 1980s which was the result of a shock upward move in interest rates and higher unemployment. The slowdown of 2008 could feel more like the doldrums of 2005 when the number of homes bought and sold fell by almost a fifth. A drop in the market’s temperature makes people feel disinclined to move. Suddenly homes are for nesting not investing. Get ready for the trend to cocoon.
 

Are some locations more vulnerable?

Slightly down-at-heel neighbourhoods populated by those who have been priced out of a nearby more salubrious areas tend to fall out of favour when the market is more depressed. There are also concerns about lower value properties (that is under £350,000) as the prospective purchasers of these homes could find it harder to get mortgages even if they are prepared to overextend themselves.

But are house prices in Kensington and Chelsea going to carry on as normal?

Lower City bonuses mean there could be fewer bidders for properties between £1 million and £2 million. But it looks as though international buyers will continue their love affair with more expensive metropolitan homes, with many opting for big flats in Chelsea and Kensington.
 

Won’t the American sub-prime scandal make things worse?

Opinions remain divided as to whether the repercussions of the sub-prime scandal - which has exacerbated America’s serious housing market slowdown – will stifle consumer spending and thus trigger a recession. If this does come to pass, the pain would spread here. But, in some quarters, there is a conviction that the US economy will contrive to brush off its cares and woes and muddle through, especially in an election year. But the credit crunch produced by the sub-prime fallout – which made banks reluctant to lend to each other and brought about the £40 billion Northern Rock calamity - may also make them reluctant to lend to you.

And why is that?

Most banks have suffered losses on their holdings of sub-prime mortgage debt. As Mervyn King, Governor of the Bank of England, warned this week, they will repair this by being less generous. Anyone needing a loan of 95 per cent or more of a property value, or aspiring to borrow five times their income should prepare for disappointment because mortgages sold to US homebuyers with poor credit records were parcelled up and sold on to institutions worldwide as supposedly secure investments.
 

Should I rethink taking out a loan to invest in a buy-to-let flat?

Buy-to-let loans will be especially hard to get. Meanwhile, low-grade developments in city centres, such as Leeds and Liverpool, that are oversupplied with flats are seen as the most vulnerable part of the market. This does not mean prospects are poor for all buy-to-let investments. Many amateur landlords are long-term investors and not overindebted; they are also enjoying rising rents with demand for rented accommodation at its highest for five years. Tenants are either prospective purchasers waiting for weaker prices, or first-time buyers priced out of the market.

I need to sell as I have a new job elsewhere. Any hints?

Peter Rollings, of Marsh & Parsons, the estate agent, recommends that you attempt to take an objective view of your property’s desirability. He says: “Even in a difficult market, a fantastic property can get a good price, but there is less enthusiasm for a lower quality house. If your house ticks all the boxes, you can be bullish about the price; but if it doesn’t then you have to set the price by relation to comparable properties that are also available.”
 

Does all this mean bargains for first-time buyers?

Despite the lending squeeze, it’s still possible to get a mortgage if you have a deposit saved. But unless you are expecting a pay rise soon, you may still struggle to afford the monthly repayments.

    Question of the Week: should I sell my house now?, Ts, 1.12.2007, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article2980478.ece

Mervyn King

in stark housing warning

as prices slide

As Nationwide records the largest monthly price fall in 12 years,
the Bank Governor says first signs of credit crunch contagion
will be in property


From Times Online
November 29, 2007
Gabriel Rozenberg and Marcus Leroux

House prices in Britain fell at their sharpest rate in more than 12 years in November, in the most dramatic warning sign yet that the housing market could be heading for a very serious slowdown.

The weak figures from Nationwide came as Mervyn King, the Governor of the Bank of England, gave warning that property prices could take an early hit from the global credit crisis.

Mr King told the Commons Treasury Committee: “In the UK, the consequences of [turmoil in global financial markets] are difficult to assess and are likely to be evident first in the housing and commercial property markets.”

Nationwide reported that the cost of an average home fell 0.8 per cent this month, the first decline since last February and the largest drop since June 1995, although it did follow a sharp 1.1 per cent rise the previous month. The average cost of a home is now £184,099, according to the building society.

The drop took the annual rate of growth down to 6.9 per cent, its weakest since August 2006, and down from from 9.7 per cent in October.

Nationwide’s findings come amid mounting evidence of a property slowdown. Separate figures released by the Bank of England showed today that the number of mortgages approved for people buying a home fell to its lowest level for nearly three years during October.

Just 88,000 home loans were approved for people moving during the month, the lowest figure since February 2005 and well down on the recent monthly average of 109,000, according to the Bank.

Yesterday, a report by HSBC said house prices in Britain appeared to be overvalued by about 30 per cent and the Land Registry, the most comprehensive source of house price data, said that house prices fell by 0.6 per cent in October in London.

Fionnuala Earley, Nationwide’s chief economist, said: "November’s data confirms that the housing market is indeed cooling in line with the weakening in housing market drivers. Poor affordability, weaker house price growth expectations and the effect of earlier increases in interest rates have all affected demand in the market."

House purchase approvals, a strong indicator of demand, slumped more than 20 per cent to 102,000 between the end of last year and September, Ms Earley said.

She added: "We expect this activity to continue to fall back throughout the rest of this year, and into the next."

Nationwide said that because monthly data can be volatile, the three-month growth rate offered a truer picture of the underlying trend. This showed a softening from 1.8 per cent last month to 1.5 per cent in November.

Howard Archer, Global Insight's chief UK and European economist, said the market will be saved from a crash by limited supply and expected interest rate cuts by the Bank of England next year.

But he added: "Nevertheless, there is undeniably a very real risk that the housing market could see a sharp correction."

    Mervyn King in stark housing warning as prices slide, Ts Online, 29.11.2007, http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article2965637.ece

Long-hours working

on the rise again in UK

· Decade of gradual decline under Labour is reversed
· TUC leader says new figures are disturbing

Wednesday November 28, 2007
Guardian
Lucy Ward, social affairs correspondent

A culture of working long hours is on the rise once more in the UK after a decade of gradual decline, according to figures today. More than one in eight of the British workforce now work more than 48 hours a week, the maximum allowed under the law unless workers agree to waive that limit. The proportion rises to one in six in London. The figures, highlighted by the TUC and extracted from the latest Labour Force Survey, prompted warnings from campaigners that children and family life risk being squeezed further.

The UK's working hours are among the longest in Europe. But there has been a steady if slow fall in long-hours working since 1997. The latest figures reverse that trend for the first time under the Labour government, with 93,000 more people now working more than 48 hours a week compared with 2006, taking the total to almost three and a quarter million (3,242,000). The increase represents a rise from 12.8% to 13.1% of the workforce.

TUC general secretary Brendan Barber called the numbers "disturbing" and blamed a "hard core of bad employers" prepared to flout laws intended to protect workers from excessive hours.

Under the European working time directive, workers are legally not obliged to work more than 48 hours, though under a special opt-out granted to the UK British employees are allowed to work longer if they explicitly agree. In practice, according to the TUC, a lack of enforcement means the directive is regularly ignored. "Employers know that this is one employment right that they can breach with little or no risk of any consequences," the organisation said yesterday. The biggest increases in the number of people working more than 48 hours are in the south-east (up 28,000 to 525,000) and in London (up 25,000 to 481,000). In the capital, over 16% of the workforce works long hours.

Barber said: "These are very disturbing numbers. They suggest that the slow, but at least steady, decline in those working more than 48 hours a week has come to an end. Many employers recognise that overworked staff are unproductive by introducing more flexibility and better work-life balance, often under union pressure. But it now looks as if their efforts are being undone by those who don't care about long hours. No one should forget that 48 hours is six eight-hour days, more than enough for anyone every week." The TUC said the official figures are unlikely to include a proper share of migrant workers and exclude those who live at their place of work, such as some hotel and care staff.

Sarah Jackson, chief executive of the work-life balance campaign group Working Families, said: "Let's not kid ourselves that this is about people in high-pressure and highly paid City jobs and think, OK, they are selling their time in return for fantastic financial rewards. This is actually about people who are doing basic jobs the rest of us depend on - and their hours are quite clearly creeping up."

    Long-hours working on the rise again in UK, G, 28.11.2007, http://politics.guardian.co.uk/unions/story/0,,2218130,00.html

House prices in Britain tumble

at fastest rate since 2005

Latest figures show
the number of new buyers
declined more swiftly
even than the faltering supply of homes for sale

November 26, 2007
From The Times
Judith Heywood,
Deputy Property Editor

House prices fell this month at the fastest rate since July 2005 as the number of new buyers declined more swiftly even than the faltering supply of homes for sale.

Hometrack, the property data company, said that prices fell by 0.2 per cent in November, dropping for the second month in a row after a decline of 0.1 per cent in October. The annual house price growth rate for the UK is only 3.6 per cent – its lowest since July last year and down from 6.4 per cent as recently as this June, when prices were said to be rising in almost 30 per cent of British postcodes.

Prices are dropping in one in five postal districts, with the pain concentrated in areas such as Avon, Buckinghamshire and Leicestershire. The worst-performing region is the East Midlands – down by 0.3 per cent in a month – but falls of as much as 0.5 per cent have been recorded in Central London.

Richard Donnell, the director of research at Hometrack, said: “Media focus on the fallout from the credit squeeze, along with relatively high interest rates, is resulting in widespread caution among homeowners, the majority of whom do not need to move and who are sitting back until the outlook becomes clearer.”

The reluctance of buyers to commit – or their inability to secure funds from anxious lenders – shows increasing signs of choking the market. Hometrack reports that a property is lingering on the market for eight weeks on average, up from 6.9 weeks a month ago, and that properties are selling for an average 93.8 per cent of the asking price, down from 94.8 per cent.

The British Bankers’ Association (BBA) revealed on Friday that new mortgage approvals had dropped to 44,105 in October, the lowest since its records began a decade ago. The BBA said that the total value of mortgages granted was £15.1 billion last month, down by 25.4 per cent in a year.

The potential extent of the global credit crunch remains uncertain, and Mr Donnell said: “While the economic fundamentals remain strong, it is hard to see the catalyst for any short-term turnaround in market confidence other than interest rate cuts early in the new year.”

The Hometrack figures for November show that the number of new buyers is down by 9.1 per cent in a month, with homes coming to market down by 2.9 per cent. Mr Donnell said: “The Christmas slowdown looks to have started early, but the underlying market conditions remain weak, with new-buyer registrations down by 26 per cent per cent over the last five months.”

    House prices in Britain tumble at fastest rate since 2005, Ts, 26.11.2007, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article2943603.ece

Housing slump fears rise

as new mortgages fall

Declining buyer and seller confidence
has reduced new mortgage approvals
by 16 per cent during October

November 23, 2007
From Times Online
Marcus Leroux

The rate of UK mortgages approvals fell by 16 per cent in October as the Government's controversial Home Information Packs discouraged sellers from putting their homes up for sale and higher interest rates put off buyers taking out home loans.

The British Bankers' Association (BBA) said today the number of mortgages approved for home-buyers fell from 54,000 in September to 44,100 last month — a 37 per cent slump on October last year.

The BBA said that the sharp fall was the delayed result of five interest rate increases since August 2006, which are now impacting the housing market.

Also, the BBA said that the introduction of Home Information Packs, faltering confidence following the Northern Rock crisis and the global credit squeeze had also taking the steam out of UK housing.

The total value of mortgages approved fell from £18.5 billion in September to £15.1 billion in October and 25 per cent below the same month last year.

David Dooks, the head of statistics at the BBA, said: “October’s data provide evidence of a rapidly slowing mortgage market and of consumers limiting their personal borrowing.

“Pressure on household finances, the cumulative impact of interest rate rises over the last year, the expanded application of Home Information Packs and the consequential impact of the credit crunch may well all have a part to play in suppressing current demand and supply.”

Last week, Nationwide Building Society forecast that house price inflation would tumble from near-double figures to zero by the end of next year.

Howard Archer, the chief UK and European economist at Global Insight, said: "Slowing housing demand is expected to steadily feed through to dampen house prices over the coming months. Indeed, there is undeniably a very real risk that the housing market could see a sharp correction."

    Housing slump fears rise as new mortgages fall, Ts Online, 23.11.2007, http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article2929358.ece

Wall Street's sharp drop

keeps London in the red

The banks were the biggest casualties
of a falling market that took builders to fresh lows

November 21, 2007
From Times Online
Robert Lindsay and Marcus Leroux

Banks and builders led a sharp drop in the stock market, driven lower today by continued uncertainty over the impact of the credit crunch and falling property prices.

The sell-off continued into the afternoon as Wall Street opened in the red, with the Dow Jones industrial average off about 139 points at 12,870, driven by fears over bank writedowns and a soaring oil price.

This is the last US day of trading before the Thanksgiving Day holiday.

The FTSE 100 fell more than125 points at one stage to 6,100.6, with Northern Rock again among the biggest fallers.

The stricken bank fell 8.25 per cent to 89p this morning, amid concern over the lack of bidders.

Alliance & Leicester dropped 4.5 per cent to 566.5p on fears that it may be exposed to financing difficulties.

Paragon, which fell more than 50 per cent yesterday, was down a further 23 per cent to 96.25p this morning.

Barclays fell 4.55 per cent at 493p, and HBOS and Lloyds TSB both slipped.

Deutsche Bank cut its target on Bradford & Bingley from 450p to 250p. It said that B&B's sale of its loan book yesterday was the first sign of banks cutting their borrowing as a result of the liquidity crisis and it expected others to follow.

It cut its earnings forecast for B&B by 29 per cent, saying that lower debt would mean a smaller return on equity.

Among builders, Persimmon shed 3.6 per cent to 771p and Barratt Developments fell by 3.6 per cent to 469.

Kingfisher, the owner of B&Q, slumped 3.24 per cent to 164 and Wolseley, the builders' merchant, fell 4.67 per cent to 643p.

BP, Shell and BG Group were among the FTSE 100's only risers after a sharp rise in oil prices.

Daily Mail & General Trust lost 7 per cent to 537p after results that were broadly in line, although they showed operating profit at the national titles falling 16 per cent and debt rising from £738 million to £950 million.

    Wall Street's sharp drop keeps London in the red, Ts Online, 21.11.2007, http://business.timesonline.co.uk/tol/business/markets/article2912929.ece

House price growth

to collapse next year

Nationwide forecasts
that house prices will fall in real terms
as the growth rate slumps from 9.7% to zero
 

November 16, 2007
From Times Online
Gabriel Rozenberg and Dearbail Jordan

The property market is due to suffer its worst year since the mid-1990s as houses fall in value across the country, Britain's biggest building society gives warning today.

Nationwide said that house price inflation would collapse from 9.7 per cent at present to precisely 0 per cent next year - below the expected inflation rate of around 2 per cent, meaning that prices will fall in real terms.

House prices would decline across much of England, but Scotland would have a relatively stable period of modest price rises

Its annual forecast for 2008 shows prices declining by 2 per cent in the North and the North West and by as much as 5 per cent in Northern Ireland.

Prices will fall in Yorkshire and Humberside, in the South West and in Wales and be will static across the Midlands and East Anglia, it predicts. London and the South East will see prices rise by a meagre 1 per cent - still a real terms cut. Nationwide predicts prices will rise by 4 per cent north of the border.

As the prospect of a slowdown in house prices heightened, nervousness about the economy kept the London Interbank Offered Rate (Libor) at a two-month high of 6.4 per cent, above the UK interest rate of 5.75 per cent.

The three-month rate at which banks lend money to each other rose to its highest rate since September 19 on fears that lenders are still facing exposure to the US sub-prime mortgage market.

The increase is in spite of yesterday's announcement by Barclays it has written off £1.7 billion of write-offs related to sub-prime assets in contrast to the £10 billion figure the City had been expecting.

Experian, the credit-checking group, said it expects its sales to slow as banks become more cautious on granting home loans to consumers in a bid to cut their exposure to the US mortgage market.

Research has shown that confidence in the property market has undergone a sea-change since the summer financial crisis.

The Royal Institution of Chartered Surveyors reported earlier this week that new properties have flooded the market as would-be sellers make a dash for the exits, with the number of homes on estate agents' books rising by 9 per cent in October.

RICS also said that prices were falling at their fastest pace in two and a half years, although other reports have yet to paint such a gloomy picture of conditions.

Mervyn King, the Governor of the Bank of England, said this week that house prices are clearly cooling after a period of unsustainable rises.

"We needed to get away from the period when we saw double-digit growth," he said. "We needed a cooling in the housing market; how far it goes remains to be seen."

Fionnuala Earley, Nationwide's chief economist, said: “Momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7 per cent to 0 per cent by this time next year.

"The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity.

"The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK.”

    House price growth to collapse next year, Ts, 16.11.2007, http://business.timesonline.co.uk/tol/business/economics/article2879650.ece

Leading Article:

Neglected home truths

about poverty in Britain

Published: 15 November 2007
The Independent

A new survey has uncovered some unpalatable truths about life in modern Britain for the very poorest. Researchers from York University interviewed 70 low-income families spread around the country and discovered that they regularly go without things that the more fortunate among us take for granted. Some have skipped hot meals because budgets are too tight. Several do not have a single family day out a year. Their homes are frequently unheated in winter. The effect of this deprivation on children is especially sad. Children as young as five are worrying about their parents' financial situation. Some do not ask for Christmas presents and keep quiet about school trips because of the cost. The cumulative mental effect of this kind of life should not be underestimated. The researchers found that it tends to induce a sense of helpless depression.

It is true that there is virtually no absolute poverty any longer in Britain of the sort that would have been recognisable in the Victorian era. Very few people starve to death any more, or lack shelter. Everyone has access to free healthcare and education by right. But that does not mean there are no longer any poor people in Britain, as these collected testimonies demonstrate. Relative poverty matters. And too many children are growing up in circumstances of neglect and deprivation.

In fairness, it should be acknowledged that the Government has had some success over the past decade in reducing poverty. Tax credits, developed by Gordon Brown when he was at the Treasury, have lifted some 700,000 children above the poverty line. This represents real progress, although poor communities still have to put up with poor transport, sub-standard housing and failing schools. When it comes to public services it is the very poorest who tend to get the worst deal.

Yet it is also true that a Government approach to reducing poverty that has relied heavily on public expenditure has reached the limits of its usefulness. The Government is not on target to reach its goal of halving child poverty by 2010. It is becoming increasingly clear that this aspiration will not be met by money alone.

Tax credits and the minimum wage have made work pay better, but a benefit "trap" remains. This is not to castigate those who rely on benefits. It merely reflects the fact that, too often, the system creates a financial disincentive for claimants to enter the job market.

The other major factor in poverty is a lack of skills and confidence. Some 2.6 million are claiming incapacity benefit. Most impartial observers have concluded that around a million of these could be in work. This would not merely be good from the perspective of cutting the welfare bill, it would be good for the claimants themselves, enabling them to lead a more fulfilling life. The Government has begun to address this problem but needs to do a lot more to promote skills training for the long-term unemployed to give them the confidence to return to the booming job market.

It is time for a new approach to the problem of poverty. The right needs to wake up to the fact that poverty is not simply a consequence of personal moral failure, but a social disease that robs people of ambition and hope. Economic liberals need to recognise that the rising economic tide is failing to lift all boats and that poverty is becoming an increasingly entrenched and geographically clustered phenomenon. Meanwhile, the left should accept that a healthy life on benefits is as great a waste of potential as deprivation itself.

Poverty in Britain is different from the poverty we read about in history books or witness in the developing world. It will require different solutions. But the challenge of wiping it out is no less urgent for that.

    Leading Article: Neglected home truths about poverty in Britain, I, 15.11.2007, http://comment.independent.co.uk/leading_articles/article3160618.ece

Bank's grim warning over UK economy

Rising inflation
and weak house market over next year,
says King

Thursday November 15 2007
The Guardian
Larry Elliott , economics editor

The governor of the Bank of England issued a stark warning yesterday of a looming economic slowdown as he signalled that the next year will be the toughest for Britain in a decade.

Putting investors on high alert for a sharp fall in share prices, Mervyn King said the period ahead would be marked by slower growth, rising inflation, a weakening housing market and a falling pound. He expressed surprise that global stock markets had so-far shrugged off evidence of the slowdown.

The governor stressed that even the two quarter-point cuts in interest rates pencilled in to the Bank's forecasts would not spare consumers from a painful period of belt-tightening next year - and that the risk was that the UK economy would be even weaker than Threadneedle Street currently expects.

Delivering the Bank's quarterly inflation report, he made clear his belief that it will be 2009 - the likeliest date for a general election following Gordon Brown's decision not to go to the country this month - before growth picks up and inflation is brought under control. With oil prices close to $100 a barrel and food prices up by 10% in the last three months, he hinted it would be some time before the Bank responded to economic weakness by cutting the cost of borrowing.

He said the Bank's "central outlook for the UK economy is, in the near term, one of slowing growth and rising inflation. But further ahead that outlook is for a return of growth to its average rate and inflation to target."

King stressed that the period of financial market turmoil that led to the run on Northern Rock was far from over and would be intensified by a tumble in share prices.

"It's very striking that despite developments we've seen in the last three months, equity prices are on average higher now than they were in August. This is true around the world and in emerging markets, they're 20% higher," King said.

In the City, the FTSE 100 index responded to a rise of more than 300 in New York's Dow Jones Industrial Average on Monday by jumping almost 70 points to 6432.1 points. King said a fall in equity markets could have a bigger impact on the world economy than the recent credit squeeze.

Threadneedle Street's nine-strong monetary policy committee raised interest rates five times between August 2006 and July this year, and King said this - coupled with tougher borrowing conditions imposed by lenders in the wake of the credit crunch - would spell the end of the UK's recent property boom.

"With house price inflation easing and commercial property prices falling, residential and commercial property investment are likely to moderate, possibly quite sharply. And with tighter credit conditions in the future, the personal saving rate is likely to rise, bearing down on consumer spending."

King also warned that the pound would need to fall in order to boost exports and to close the UK's £7bn a month trade deficit in goods. Despite its recent strength against the dollar, sterling hit a four-year low against the euro yesterday at €1.4017.

City economists said the gloomy tone of the inflation report hinted at rate cuts early in the new year.

King gave no hint that interest rates would be cut soon, pointing out that the Bank remained concerned that dearer energy and food would prompt higher pay demands and the start of a wage-price spiral. "In comparison with August, the near-term outlook is less benign for both inflation and growth. Last week, the MPC judged that it was appropriate to leave bank rate ahead. There will be some difficult decisions in the months ahead."

    Bank's grim warning over UK economy, G, 15.11.2007, http://www.guardian.co.uk/business/2007/nov/15/economy1

British banks’ value

dives by £90bn in nine months

November 10, 2007
From The Times
Miles Costello

Nervous investors have wiped more than £90 billion off the value of Britain’s eight leading banks in the past nine months on fears that they are heading for major credit losses, an analysis by The Times has found.


The two biggest casualties have been Barclays, which was hit yesterday by false rumours that it was poised to write down £10 billion, and Royal Bank of Scotland, also seen as exposed to highly geared credit markets.


The rumours about Barclays saw its shares plunge more than 9 per cent at one stage yesterday, leading to them being temporarily suspended.


Meanwhile it emerged that the damage done to London’s reputation by the Northen Rock crisis will be discussed at a meeting between financiers and Alistair Darling, the Chancellor, next week.


Barclays, which denied the latest speculation, has seen its market value tumble by £21.1 billion since February 7, when its rival HSBC first gave warning about its exposure to the American sub-prime downturn. Despite efforts by senior Barclays figures to reassure shareholders in recent months, its shares have fallen from 763p on that day to as low as 442p yesterday, a slide of 42 per cent. The bank’s market value, which stood at £53.4 billion in February, has fallen to £32.3 billion.


Diving bank prices compare with a remarkably resilient showing by the FTSE 100 over the same period. London’s blue-chip stock index closed at 6,370 on February 7. Yesterday, the FTSE ended at 6,304.9, a fall of 65.1 points, or just over 1 per cent.


Barclays’s sliding share price was one of the main reasons it lost out to RBS in its effort to buy ABN Amro, the Dutch banking group that would have turned the UK’s third-largest bank into a top-five global player.


Barclays shares rallied after it issued a formal denial of the writedown rumours. “There is absolutely no substance to these rumours,” a bank spokesman said. The shares finished the day 11½p lower at 474½p.


RBS, while victorious in the fight for ABN, has been the biggest loser in terms of market value. It has tumbled from 691½p in February to a low yesterday of 387½p, knocking £29.4 billion off its market capitalisation.


HBOS, dominant in the UK mortgage market, has fallen in value by £14.5 billion since February. The bank lost market share in mortgages during the first quarter, but is also exposed if the American housing downturn spreads to this side of the Atlantic.


HSBC, forced into its first profit warning by the credit crisis, is worth £11.8 billion less than it was in February. The UK’s biggest bank and one of Europe’s largest by assets, it still has a market worth of £100.7 billion. Other banks to fall foul of market nerves include Bradford & Bingley, the mortgage lender, Alliance & Leicester and Lloyds TSB. Valuations of these three have fallen by just over £10 billion in the past nine months.


Alex Potter, an analyst at Collins Stewart, has been bearish on the UK banking sector all year, although he retains a “buy” recommendation on Barclays. He said that if Barclays and other banks were on course to “materially miss consensus”, they would have to notify the stock market formally.


“That said, there is a lot of fear out there,” he added. “It is a pretty irrational market. People just go online and check out the credit indices. They see even decent triple A-rated paper is trading at pretty big haircuts.”


Northern Rock, the Tyneside mortgage lender, has been the highest-profile casualty of the credit market rout, forced to seek emergency funding from the Bank of England.


Rock, which is negotiating a sale or possible break-up, was worth £5.2 billion at the start of the year before its overambitious mortgage expansion drive ran out of steam. Yesterday, it was valued at just over £620 million.


The Timesanalysis compared banks’ prices at lunchtime yesterday with closing share prices on February 7.

    British banks’ value dives by £90bn in nine months, Ts, 10.11.2007, http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2843984.ece

Wall Street

pushes London further into red

November 9, 2007
From Times Online
Robert Lindsay

Credit crunch fears depressed banks and forced Barclays to deny it is about to writeoff £10bn losses
 

Wall Street opened down more than 150 points, pushing London shares even deeper into the red as fears over write downs of financial stocks refused to go away.

Barclays led the FTSE-100 down on rumours of a £10 billion credit related write-off, and was forced to deny the talk. A Barclays spokesman dismissed the speculation. "There is absolutely no substance to these rumours," he said.

By 3.05pm the FTSE-100 was down 94.2 at 6287.7 and the Dow Jones was off 159 points at 13107.3.

The shares at one stage fell 7 per cent or 44p and rallied a little on the denial although by 12.45pm they were back down 6.3 per cent at 455p. At one point so many people were trying to sell at the same time that trading was temporarily suspended.

But growing worries about the credit crunch in the US spilling over into the UK hit all the major financials on London today.

Friends Provident plunged 6 per cent to 150.6p after UBS cut its price target to 175p from 210p saying that the Friends had not much room for growth following the end of the Resolution merger and that it may have been too generous in estimating its asset values. There is also talk that the imminent buy back of convertible shares, using cash and a new share issue, due December 11, might be hurting the stock, although this was announced two days ago.

Standard Life lost 4 per cent to 242.5p on mounting fears it too will be hit by the collapse of mortgage backed assets.

Royal Bank of Scotland lost 4 per cent to 398.25p as traders fear it will have to mount a rights issue to prop up its balance sheet following the ABN Amro acquistion. "It's a vicious circle," said one senior trader, "As its shares fall, the size of a rights issue will have to get larger to raise the same amount of cash."

The plunging financial stocks weighed down the FTSE and counteracted the soaring miners, and by 11.35am a gain in early trading of 61 points had turned to a fall of 66 points to 6315.4 by late morning.

BG Group gushed another 4 per cent to £10.29 today on the news of more recoverable oil than expected at its Tupi field off Brazil. Deutsche Bank told clients to fill their boots with BG, which owns 25 per cent of the project. "Stupendous!" said analyst Lucas Herrmann who said it added 120p fair value to the price and made it a more attractive bid target.

He raised his target to £10.90, mirroring Credit Suisse late yesterday which upped its target to £11.00.

Meanwhile the Rio Tinto story continued to spark excitement. At 10am the Takeover Panel triggered talk that BHP had built a stake in Rio in the open market after it said was allowing Rio and BHP Billiton to delay releasing information about the number of shares they have in issue while discussions over the rule on stake building disclosure continued.

Rio shares gained another 6.7 per cent to £56.72. Analysts said BHP might raise its bid, bring in other parties, or Brazilian firm CVRD might be tempted to enter the fray.

BHP Billiton gained 2.72 per cent to £17.01.

British Energy bounced back from its falls of the past few days on fears over shutdown of its nuclear stations after Goldman Sachs upgraded its target to 681p and put it on its conviction buy list saying that even if the four reactors never returned to service, it was undervalued. It gained 2.5 per cent to 524.5p.

    Wall Street pushes London further into red, Ts, 9.11.2007, http://business.timesonline.co.uk/tol/business/markets/article2840014.ece

8.40am GMT

House prices continue to fall

Thursday November 8 2007
Guardian Unlimited
Hilary Osborne

House prices in the UK fell for the second month running in October, the UK's largest mortgage lender said today, in a further sign the market may be grinding to a halt.

The 0.5% fall reported by the Halifax follows a 0.6% dip in September - the first time prices have dropped in two consecutive months since the early summer of 2005.

The fall has brought annual price inflation down to 8.9%, from a high point of 11.4% in August.

The average price of a home in the UK now stands at £197,248, Halifax said.

This is the first time since February that the annual growth rate recorded by the lender has been in single figures.

Halifax said the rate was expected to fall further over the next few months as the strong monthly price gains seen in the autumn of last year began to drop out of the equation.

Growth over the three months to the end of October stood at 0.3%, Halifax said, continuing a downward trend that started at the end of last year, part way through the last cycle of interest rate rises.

The bank's chief UK economist, Martin Ellis, said the three-month figures were a good guide to the underlying trend and suggested a "steady easy" in price growth.

"The rise in interest rates since August last year and negative real earnings growth so far this year are curbing housing demand, leading to a slowdown in both price growth and activity," said Mr Ellis.

There are signs elsewhere that activity in the market is declining, with the number of mortgages approved for house purchases down 6% in September, and levels of interest from new buyers also down.

However, Mr Ellis said he did not expect to see prices crash.

"The UK economy is in a strong position. Sound market fundamentals, including high levels of employment and a shortage in the number of properties available for sale, will continue to support house prices," he said.


Volatile data

Halifax's figures contradict last week's claim by Nationwide building society of a 1.1% rise in prices over October.

The rise, which took many industry watchers by surprise, took annual price inflation to 9.7% - lower than the 11.1% peak in June, but higher than the 9% of the previous month.

Howard Archer, chief UK economist at consultancy Global Insight, said: "Housing data can be very volatile on a month-to-month and survey-to-survey data, and we suspect that the Nationwide survey was an outlier.

"Most data and survey evidence are pointing to weakening housing market activity and cooling prices in the face of slowing activity, increased affordability pressures and tightening lending practices, and the Halifax data are certainly consistent with this."

Going forward, most commentators are predicting an almost static market next year.

Hometrack and the Council of Mortgage lenders have both said they expect a 1% rise in prices in 2008, while Capital Economics is predicting a 3% fall.

This lunchtime the Bank of England's Monetary Policy Committee will announce its latest interest rate decision.

While it is expected to cut rates at some point from the current level of 5.75%, most commentators don't expect it to do so today.

    House prices continue to fall, G, 8.11.2007, http://www.guardian.co.uk/money/2007/nov/08/houseprices.personalfinancenews

House prices to 'slow not crash'

Tuesday November 6 2007
Guardian Unlimited
Hilary Osborne

The UK housing market is heading for a slowdown rather than a crash, it was predicted today.

According to the latest UK Economic Outlook from accountancy firm PricewaterhouseCoopers (PwC), there is a one in five risk of house prices being lower in cash terms in 2010 than today.

However, the chance of a fall in real terms - when inflation is taken into account - rises to one in three, the report said.

The firm's model of the housing market, which includes data on supply of properties, household income and interest rates, suggested that in mid-2007 house prices were overvalued by 10%.

When supply constraints were taken out of the equation, prices appeared to be 20% too high.

But PwC said the most likely scenario was that house prices would continue to rise at a rate slightly above inflation until 2010, although there would not be the double-digit growth seen in recent years.

Looking further ahead, the report predicts that even if the government meets its target of building 3m homes by 2020, between now and then prices will rise significantly faster than inflation.


Risk of a fall

"There is clearly some risk of house prices falling over the next three years, but these risks are mitigated by continuing housing supply constraints," said John Hawksworth, head of macroeconomics at PwC.

"The most likely scenario is for a slowdown in the housing market rather than an outright fall in prices, but the latter nonetheless represents a material downside risk for the economy more generally, given the likely knock-on effects of lower house prices on consumer confidence and spending."

Last month, the International Monetary Fund warned that the UK could be headed for a US-style housing crash, with global financial turmoil hitting a market over-valued by more than a third.

More recently, some industry commentators have predicted growth next year, but at a rate below inflation. Last week, Hometrack and the Council of Mortgage lenders both said they expected a 1% rise in prices in 2008.

The PwC report also looked at the prospects for the wider UK economy.

It predicted a slowdown in GDP growth from around 3% this year to 2% in 2008, and said interest rate rises and debt levels meant growth in consumer spending looked set to slow by the same amount.

Inflation as measured by the consumer price index should remain around its target level of 2%, it said, while interest rates may fall.

    House prices to 'slow not crash', G, 6.11.2007, http://www.guardian.co.uk/money/2007/nov/06/houseprices.personalfinancenews

Home repossession orders drop

Saturday November 3, 2007
Guardian
Hilary Osborne


Orders for home repossessions and insolvencies in England and Wales fell in the third quarter of the year, figures showed yesterday, despite warnings that high interest rates and record levels of personal borrowing have created a debt crisis.

The Insolvency Service said 26,072 people had been declared insolvent, a fall of 3% on the previous quarter and 5% down on the same period last year.

The number of bankruptcies was up 2.2% year on year, to 15,833 but the number of individual voluntary arrangements (IVAs), which allow borrowers to renegotiate their debts, dropped by 14.3% to 10,239. IVAs allow a borrower to write off some debt in exchange for entering into a payment schedule with creditors, but have been criticised by lenders who are often forced to write off bad debts.

James Falla, managing director of debt management firm Thomas Charles, said the lenders' reaction was the reason behind the fall in the latest figures. "Over the past 12 months, lenders have been tightening up their criteria over what they will accept as an IVA," said Mr Falla. "Some lenders have very much closed their doors to IVAs."

Mr Falla said while there were no figures showing which lenders had accepted applications for IVAs, anecdotal evidence suggested Northern Rock was rejecting applications.

He added that while lenders would traditionally consider IVAs that proposed a repayment of 25p in the £1, HSBC, which has in the past been an outspoken critic of such arrangements, has raised its threshold to 40p. As a result, borrowers who would have entered into IVAs are instead entering into debt-management plans with their creditors, for which there are no official figures.

Meanwhile, separate figures from the Ministry of Justice show the number of orders made for home repossessions dropped by 1% in the third quarter of the year to 23,806.

    Home repossession orders drop, G, 3.11.2007, http://business.guardian.co.uk/story/0,,2204422,00.html

7.45am GMT

House prices keep on rising

Wednesday October 31 2007
Guardian Unlimited
Ashley Seager

The average price of a typical UK property was £186,044 in October

House prices rose by a robust 1.1% in October from the month before, the Nationwide building society reported today but it added that the market was clearly slowing.

The rise followed a 0.7% increase the month before and took the annual rate of increase up to 9.7% from 9% in September but was below the June peak of 11.1%.

The average price of a typical UK property was £186,044 in October, £16,421 more than the same month last year.

Fionnuala Earley, Nationwide's chief economist, said: "The rise in the annual rate temporarily breaks the slowing in price growth we have seen since June, but is unlikely to mark the start of a new upward trend.

"November and December saw particularly robust gains in 2006, and unless prices perform very strongly for the rest of this year, the annual rate of price growth will resume a downward path."

Almost all other housing market indicators such as new mortgage approvals and new buyer enquiries have been pointing down recently and website Hometrack reported earlier this week that prices actually fell last month, led by London and the south-east, which have until now been the strong areas of the country.

Ms Earley said it would be wrong to interpret the strong October number as a sign that house prices were continuing to defy the effects of higher interest rates and the global credit crunch which has restricted the number of products on offer from mortgage lenders.

"Most leading indicators of housing market activity are continuing to weaken. Surveyors are reporting the weakest levels of new buyer inquiries in many years and mortgage approvals are falling from recent highs amid weaker demand and tighter lending criteria for riskier borrowers."

Most City economists think that interest rates have now peaked at 5.75% and that the Bank of England will start cutting them soon as the economy slows down. But few expect the first rate reduction until early next year.

"The marked 1.1% jump in house prices in October reported by the Nationwide is a real eye-opener, and substantially dilutes the case for an interest rate cut in November," said Howard Archer, economist at Global Insight. "Indeed, the data reinforces our view that the Bank of England will not trim interest rates until next February."

    House prices keep on rising, G, 31.10.2007, http://business.guardian.co.uk/story/0,,2202225,00.html

Bleak warning

of US-style British housing slump

The International Monetary Fund said today
that soaring UK prices have rendered
the market vulnerable to correction


October 17, 2007
From Times Online
Gary Duncan, Economics Editor

Runaway increases in Britain’s house prices over the property boom of the past 10 years have left the housing market in danger of an American-style slump in the value of homes, the International Monetary Fund said today.

In a bleak warning, the IMF finds that the cost of homes in Britain and other European countries may have become much more excessive than in the United States before the present property slump began there.

Its finding will fuel fears over the housing market’s prospects after recent evidence in a series of key surveys that house prices have begun to fall in some parts of the UK.

“The extent of house price over-valuation may be considerably larger in some national markets in Europe than in the United States,” the IMF concludes. “Taken at face value, the estimates suggest that a number of advanced economies’ housing markets outside the US could be vulnerable to a correction.”

In its twice-yearly report on world economic prospects, the IMF warns Europe’s governments that tightening lending conditions for homebuyers triggered by the present worldwide credit squeeze could be the spark for a serious correction in excessive house prices.

“The steady increase in interest rates has already contributed to some cooling of these housing booms, and recent developments are likely to have a further dampening impact, particularly if credit availability were to be tightened,” it says.

“There would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch.”

The report notes that across the West, and in Europe in particular, house prices have charged upwards in relation to people’s incomes and also when compared with rents. In Britain, house prices now stand at about nine times annual earnings - up from only about five times in 2001.

“The largest increases in house prices relative to incomes have been experienced by France, Ireland, the Netherlands, Spain and the UK,” it notes.

In an analysis using a model of the key driving forces that can justify higher house prices, from rising incomes, to borrowing costs and population, the IMF found that across 18 rich Western nations only three-quarters of the rise in house prices over the past decade can be explained by these fundamental factors.

The unexplained 25 per cent of the rise in prices suggests substantial over-valuation and that prices could be prey to a correction.

In the UK, the IMF’s number-crunching indicated that only 60 per cent of the rise in house prices since 1997 is explained by its model of fundamental factors, leaving 40 per cent unexplained.

The Washington-based fund does qualify its assessment, however, conceding that there are “considerable uncertainties” surrounding its analysis. Its model of prices does not, for example, factor in key factors in the British market such as shortages of housing supply, boost to prices from immigration, and greater affordability owing to the availability of mortgage financing. These factors are “likely to continue to support housing sectors in particular national markets”, it concludes.

Compared with the situation in the US, which is in the grip of a severe housing market slump, the IMF also notes a number of “moderating factors” in European countries such as Britain. Unlike the US, European housing markets have largely avoided lending to financially exposed homebuyers through “sub-prime” loans, so lending standards have been higher, it notes.

If housing markets in Europe were to slump, the IMF also argues that the countries that would face the most severe economic impacts would be those where residential building booms have gone hand in hand with rising home values, boosting past economic growth. Ireland and Spain are singled out as in this category. But in the UK and the Netherlands, the construction industry has been less important to economic growth as building has been limited by planning restrictions.

    Bleak warning of US-style British housing slump, Ts Online, 17.10.2007, http://business.timesonline.co.uk/tol/business/economics/article2678215.ece

House prices

fall at the fastest rate in two years

Thursday October 11, 2007
Guardian
Angela Balakrishnan

House prices across the UK tumbled last month at the fastest rate for two years, a leading industry survey shows today, while demand from first-time buyers plummeted sharply, adding to widespread evidence that the housing boom could be over.

The Royal Institution of Chartered Surveyors said house prices declined in September for the second month in a row with 14.6% more surveyors reporting a fall in prices rather than a rise. This was an increase on the 3.3% more surveyors that reported a fall over a price rise in August.

New buyer enquiries fell for the tenth consecutive month and at the fastest pace since March 2003 as five interest rate rises by the Bank of England since August last year and recent tightening of mortgage lending criteria put up the cost of a home. "The combination of rising interest rates, the introduction of home information packs and volatility in the financial markets resulting in tightening of lending criteria, has certainly affected the confidence of buyers and sellers," said Jeremy Leaf, spokesman for RICS. "As a result, some would-be buyers are turning to the rental market."

"At this time of the year and just before Christmas we would usually see the market pick up after children go back to school," said Ian Sandy, a surveyor in Mansfield, Nottinghamshire. "We are seeing a very depressed market."

However Mr Leaf said a market meltdown was unlikely. Recent data show that the UK's underlying economy remains strong and with speculation high that the next move in interest rates will be down rather than up, Mr Leaf said buyers were using the opportunity to negotiate with more flexible vendors.

The survey showed vendors are under no pressure to sell, and the supply of new properties on the market fell for the fourth month and at the sharpest rate since June, helping to support house prices. However, London, whose economy is heavily geared towards the financial services sector, was the only region in the survey to experience a rise in sale instructions.

Scotland saw the strongest price growth, but large price falls were recorded in East Anglia, Wales, and the Midlands. The south-east, north-west, south-west and Yorkshire and Humberside also saw small decreases in price. London showed a small rise in prices. The RICS September survey follows other price indices from the Halifax and Nationwide which also showed that the housing market was starting to turn from the double-digit annual price growth seen earlier this year.

Looking ahead, RICS said that surveyor confidence had further deteriorated, especially following the Northern Rock crisis. Sales expectations hit the lowest levels for over four years. Expectations of prices rises fell to the weakest level for over two years.

Many economic forecasting groups have said that the housing market will be particularly hard hit next year as the full impact from the credit crunch is felt.

    House prices fall at the fastest rate in two years, G, 11.10.2007, http://money.guardian.co.uk/houseprices/story/0,,2188331,00.html

5.15pm update

Darling hits back

with inheritance tax move

Tuesday October 9, 2007
Guardian Unlimited
Deborah Summers, politics editor

Alistair Darling took on the Conservatives over inheritance tax today as he announced that the threshold for couples to would be doubled to £600,000 - with immediate effect.

The chancellor also used his first pre-budget report to pledge an extra £400m this year for the armed forces and a closing of the loopholes that allow private equity bosses to pay less tax than their cleaners.

He also adopted opposition proposals to switch flight taxes from individual passengers to flights - penalising airlines that fly half-empty planes.

But in a clear attempt to wrest the political initiative from the Tories, who last week pledged to exempt all but millionaires from inheritance tax, Mr Darling accused the shadow chancellor, George Osborne, of creating £2bn shortfall in the Conservatives' spending plans.

Under Mr Darling's proposals, the total amount of inheritance for married couples and civil partnerships on which no tax is paid will immediately rise to £600,000.

By 2010 the combined tax-free allowance for couples will rise to £700,000.

This will be backdated indefinitely for every widow or widower, and in future years, both house prices and inflation will be taken into account when setting thresholds.

His proposals came after the Tories promised at their annual conference last week to exempt estates under £1m from inheritance tax.

However, Mr Darling dismissed Tory plans to pay for the cut with a £25,000 flat rate charge on "non domiciled" wealthy foreigners - saying it would raise just £650m, not the £3.5bn that the Tories claimed.

But to opposition jeers of derision he said that he would be bringing forward his own measures to ensure that the "non-doms" were made to "pay their fair share".

Mr Darling said that his inheritance tax proposals would mean that 97% of estates would be exempt while leaving him with an extra £2bn to invest in schools and hospitals.

Spending on the NHS in England would rise from £90bn this year to £110bn in 2010, Mr Darling said.

On the wider economy Mr Darling said the background to the report was one of "increased international economic uncertainty and a more fragile global environment".

Setting out the government's comprehensive spending review, the chancellor said funding would be tighter for many departments.

But he promised an extra £400m for the armed forces, including cash for improved accommodation.

A new single budget for tackling terrorism would bring together the work of the police, the security services and all parts of the government responsible for addressing the threat.

It will rise every year over the next three years to £3.5bn a year, representing a trebling in cash terms in a single decade, he said, including £700m over the next three years for Home Office anti-terrorist work.

    Darling hits back with inheritance tax move, G, 9.10.2007, http://politics.guardian.co.uk/economics/story/0,,2187091,00.html

PBR: Key points at a glance

Highlights of Alistair Darling's statement to parliament

Tuesday October 9, 2007
Guardian Unlimited
Haroon Siddique


· Health investment will fund 20 new hospitals and 100 new GP practices

· Health investment will rise from £90bn this year to £100bn by 2010

· NHS funding will be 4% above inflation

· £74bn budget for education in 2010

· £2bn extra to be invested in health and education.

· Future inheritance tax thresholds will be based on house price rises and inflation

· By 2010 the threshold for inheritance tax threshold will rise to £700,000

· Inheritance tax threshold for couples doubled to £600,000

· Grants to local authorities to increase to £26bn by 2010

· £4bn by 2010 to help people living in poor quality homes to renovate their properties

· Extra £200m to fund free national bus travel

· Social care budget to rise to £1.4bn by 2010

· Pension credit to be £260 per year for single person.

· Child tax credit increasing by £175 from next year.

· Doubling child maintenance to £20 a week next year and then to £40

· Development aid to rise to £9bn by 2010.

· From 2009 aircraft levy will be on flights instead of individual passengers.

· £800m a year for flood defences by 2010

· Department for Environment, Food and Rural Affairs funding up to £4bn by 2010.

· Non-domicile taxpayers will face charge after seven years and tax after 10 in plans to be finalised and which would raise £650m.

· Changes to capital gains tax,withdrawing loopholes available to private equity firms.

· Main rate of corporation tax to be cut 2p to 28p next year.

· Doubling money spent on upgrading rail network.

· £14.5bn investment in transport by 2010.

· Expand single fund for health research to £1.7bn by 2010.

· Home office and Ministry of Justice to get £20bn by 2010

· Single budget for the work of the police and others addressing the terrorist threat with growth to £3.5bn in three years' time at a rate of £1bn a year.

· £400m extra for the armed forces including improvements in accomodation for members of the forces and their families

· Departmental spending will rise to £397bn next year from £345bn

· Borrowing will fall to £23bn by 2012

· 'We will take no risks with stability'

· Growth expected to be 3% this year

· Growth next year to be 2% to 2.5%

· 2009-2010 forecast for growth 2.5% to 3%

PBR: Key points at a glance, G, 9.10.2007, http://business.guardian.co.uk/prebudgetreport2007/story/0,,2187051,00.html

2.30pm update

Government guarantees

all Northern Rock savings

Tuesday October 9, 2007
Guardian Unlimited
Graeme Wearden


Shares in Northern Rock soared by 21% today after the government threw the bank another lifeline by protecting all its current and future savings accounts indefinitely.

The Treasury said this morning that it has agreed to help Northern Rock while it negotiates with potential buyers, by guaranteeing all retail deposits made after September 19.


Two weeks ago, it said it would be "unfair to other banks and building societies" to offer this protection to savers who only opened accounts after Alistair Darling offered the original guarantee.


It now appears, though, that the troubled Newcastle-based bank needs extra help while it attempts to find a buyer.


A spokeswoman for Northern Rock said the new guarantee would allow the company to continue pursuing discussions with interested parties. These are thought to include several private equity firms.


The City saw today's announcement as good news for the troubled bank, sending its shares soaring by 36.2p to 208.75p by midday.


Rival banks and building societies may be less impressed. Even though the Financial Services Compensation Scheme was beefed up last week, it still only guarantees the first £35,000 of savings.


The Treasury said that the bank would pay "an appropriate fee" in return for the protection, so that it would not receive a commercial advantage.


The Northern Rock spokeswoman declined to say how much this fee was, or reveal how many new savers have opened accounts since its troubles began.


In a statement, the bank revealed that it expects to incur costs of up to £50m - which represents nearly 10% of last year's pre-tax profits - while it fights for its future. This includes both its own fees and costs run up by the tripartite authorities - the Bank of England, the Financial Services Authority, and the Treasury itself.


It also confirmed that it has appointed Citigroup as an advisor, and that it has received "a number of approaches regarding a variety of potential transactions".


Private equity groups that are taking an interest are thought to include JC Flowers, Blackstone, Apollo Management, Cerberus and Lone Star. Negotiations are said to be proceeding slowly, and any deal is thought unlikely to be completed before Christmas.

Government guarantees all Northern Rock savings, G, 9.10.2007,
https://www.theguardian.com/business/2007/oct/09/politics.money

Cost of large mortgages

hits post-9/11 high

as credit squeeze

ripples through economy

Tuesday October 2, 2007
Guardian
Larry Elliott, economics editor


The summer turmoil in the world's financial markets has led to a credit squeeze on homeowners and businesses as risk-averse lenders make borrowing more costly, the Bank of England revealed yesterday.

The Bank's data for August showed that even before the Northern Rock crisis last month, the cost of large mortgages rose to the highest since the 9/11 terrorist attacks in 2001. Firms were paying two percentage points more for loans than in 2006.

Michael Saunders, UK economist with Citi, said: "We suspect that the September readings will show even greater widening of credit spreads ... the ongoing crisis in money markets is feeding through to the real economy.

"Given the major role of wholesale funding among banks and non-bank financial institutions, changes in financing costs on the trading floor, if sustained, feed through to the shop floor and factory floor. All this will exacerbate the slowdown."

The data showed that the average quoted interest rate spread between a two-year fixed-rate 95% mortgage and a 75% mortgage rose to 0.45 percentage points in August, from 0.29 points in July - making less secure borrowing relatively more expensive.

The cost of bank loans of up to a year for non-financial companies - which account for more than 75% of fixed-rate corporate debt - increased by 0.41 percentage points in August. With the market turmoil following five rate rises since August last year, analysts said they were not surprised to see demand for mortgages slackening.

The Bank said new home-loan approvals in August fell from 115,000 to 109,000, the weakest since April. Lenders heavily reliant on raising funds on the wholesale markets, such as Northern Rock, reported a drop from 32,000 to 27,000.

Howard Archer, economist with Global Insight, said: "While some indicators are showing resilience, it does appear that the housing market is now increasingly faltering in the face of the financial market turmoil and the increasing affordability pressure on house buyers, coming from higher interest rates, elevated house prices and modest real disposable income growth."

The Bank also said mortgage equity withdrawals in the second quarter of 2007 fell from £13.1bn to £10bn - the lowest level since the third quarter of 2005.

Meanwhile, the Chartered Institute for Purchasing and Supply reported a moderation in the pace of expansion of manufacturing. Its purchasing managers index fell from 56.1 in August to 55.1 in September, but remained well above the 50 level that divides expansion from recession. Factory-gate price inflation was its strongest since the index was first published in 1999, reinforcing expectations that interest rates will remain at 5.75% this week.

Cost of large mortgages hits post-9/11 high as credit squeeze ripples through economy,
G, 2.10.2007,
https://www.theguardian.com/business/2007/oct/02/
mortgages.money