DavecUK Take a simple logic scenario, it’s absolutely in the best interests of lenders to not let house prices fall/crash. Their profits would take a massive hit, potentially unrecoverable. It’s why they facilitated rising house prices. Like the last few house market “crashes”, people simply hunkered down and waited, yes a few homes were lost, really not that many. This is because the financial institutes found ways to help people keep their homes, because they needed to keep that addiction to massive mortgage debt going. The housing market basically stagnated, estate agents closed down but the price of houses didn’t really fall very much at all. I remember for the very few properties on the market, they were either in very bad condition, in bad locations, or people were forced to sell.
Well, yeah. But there’s a lot of nuances. The “lenders” pretty much have an either-way bet. If borrowers are able to ride out the crash, the lenders continue to get their regular income (and hence profit) stream, even if they have to “assist” some. That assistance can take many forms, but is often some variant of extending credit even further so the borrower ends up either paying more, or for longer, or both. Their “help” is really just another profit centre, with a nice, friendly-lookng camoflage. But for all that, it does help the borrowers avoid losing their homes.
Some borrowers, however, they will assess as a bad risk looking forwards. In that case, they still have the asset the loan was secured on, provided they act before prices crash too much. Ironically, in some situations that gives them a motive to move more quickly to foreclose on default than they would have if prices were stable.
But even if property prices do crash, they have a final safety net of, with one assumption, just sitting on the asset itself, maybe renting it out themselves (perhaps to the mortgage defaulter, which saves the time, cost and lost revenue while they get a new tenant) for a few years, and waiting for prices to go back up. The ‘owner’ ends up paying rent to stay in property he/she used to part-own but at least they still have a home.
Under anything but exceptional circustances, the lenders can’t lose. One such set of exceptional circumstances is where these self-deluded Titans of finance convince themselves they’re invincible and don’t adequately cover their butts. Just like individual homeowners can, and indeed by the millions did, ride out the last couple of crashes, so can lenders providing they have the capital and cash flow to do so. But just like individuals, if they over-extend in terms of capital, and fail to maintain that liquidity necessary for servicing day-to-day operations, they can get taken down. The textbook example is the morons in goverments (around the world but especially in the US) loosening banking regulations too far, and for perhaps admirable but ultimately naive social engineering reasons, setting up a ‘bound to fail’ subprime mortgage market. If you lend lend property-buying sums of money to someone who really can barely afford the repayments right now, you’re a hostage to fortune if their circumstances deteriorate even fairly minimally, and you also have effectively created a new form of slavery. They say the road to hell is paved with good intentions, and that is a good example.
While owning your own home is a perfectly laudable objective, it is certainly not without downsides and that is one - don’t do it if you can’t afford it, including a buffer, a margin of error for unexpected events. We recently found that what appeared to be a leaking roof gutter was actually a sympton, not the cause. The cause was a couple of cracked tiles that were invisible from the ground, and the result was some rotted joists that, left unattended, would have put the structural integrity of the whole roof at risk. Even so, the repairs cost over a grand in scaffording alone, and over tive grand in total for minor damage. The whole roof would have been more like £50k (and no, nt covered by insurance. Grrr.). Imagine paying that if you fully extended yourself just getting on the property ladder, as so many youngsters have to these days (and to be honest, most always did have to) and if you then lose your job, or interest rates double your mortgage, like mine did …. :(
If you then combine that kind of housing crash with the pure greed and stupidity of the financial titans in all their fancy financial products that were essentially just gambing, you have a perfect storm and while JP Morgan is by far the best known casualty of that, they were a long way from the only one. I mean, take all those mortgage products, ranging from gold-plated near zero risk, right down to a morass of subprime speculation, lump them all into one financial mix and then stick it in a blender so nobody can tell what the actual risk is. Then sell it in chunks and you have a recipe for making a mint …. right up to the point where the pyramid collapses. and of course, it did.
The real morons in that, in my opinion, were the politicians (including here) that relaxed banking regulations so far that it was possible. The good news, such as it is, is that those regulations have been somewhat tightened since. Not enough, in my view, but somewhat, back in the direction of the capital ratios and liquidity requirements we used to have.
The really terrfying bit? That’ll be what’s going on in China, right now. My nephew has just got back from living in China for years. It took him about two years just to get out, taking his money with him. Getting out wasn’t too hard, but getting his bank savings transferred sure was. The problem in China? For years, they’ve had huge economic success, and whopping great annual growth. That’s good but if you start to assume it will always be like that, it’s the same danger the West faced years ago, but with a couple of billion people. So, massive economic success leads to growing affluence, which leads to massive demand for property, which leads to over-extending construction with insufficent liquidiy ’cos hey. it’s a money-printing game, innit? Yes it is … until it isn’t, like JP Mprgan et.al. They actual got people to go along with “pre-selling”, that is, if you want to reserve a flat in such-and-such a block, you buy and start paying the mortgage, months and sometimes years before they start digging the hole in the ground, never mind finishing construction so you caan move in.
Combine that with a massively diverse and fragmented banking sector, due to a massive and wide-spread population with wholly inadequate banking regulation, and now you have banks selling mortgages on currently non-existent properties because they claim, falsely, that such deposits (and standard current account deposits) are savings which have central government protection (like here) when in fact they’re in investment accounts, much of it in that unbuilt property, and investments (also like here) do not come with a guarantee of government underwriting any babk failure. Note - even such under-writing here isn’t what it once was - check out the bail-in legislation from a few years ago that puts virtually ALL deposits in banks on the hook in front of the taxpayers having to bail–out.
But back to China …. a housing pyramid, massively over-extended and failing economic growth resulting in reduced liquidity, so work on loads of buildings has ceased. Job losses going up, and depositors trying and failing to get their money back, and out of banks (like my nephew) and being told, bluntly, “no”. You then have thousands waving placards protesting in the streets (and they are) and doing that in an authoritarian country like China is ballsy as hell.
China, right now, is facing the very real risk of an existential level housing market collapse and a resulting and linked banking collapse that’s very redolent of the US subprime fiasco, but writ very, very large indeed.
And we certainly can’t sit smugly in the West thinking it won’t affect us. It will. It’s been said for decades re: the US economy that if they sneeze, the rest of us catch a cold. While the US is still a bigger economy that China it ain’t by that much. Massive upheavals as certainly appear to be brewing in China WILL hit industrial output, and as China is pretty much the the manufacturing hub for many market segments of the West, chaos in China = massive supply issues here.
Being a cynic, I have to wonder if there’s any link between such unrest, and China’s sudden aggressiveness over Taiwan. I have to wonder if it’s a CCP version of Thatcher’s rather convenient boost in popularity from tub-thumping over the Falklands. It certainy changed heavy unpopularity into a general election win. I doubt it was coincidence. China too (without the election bit), perhaps?
With all this going on, and absolutely outside our ability to even have a minor nfluence on it, there are far, far bigger risks to our economy, and all that rests on it including housing, than a 0.5% rise in interest rates to try to combat inflation. The insidious bit is that interest rate rises might help combat inflation where said inflation is home grown and demand-led but it’ll do naff-all against inflation that is almost entirely imported and unaffected by our rates, whether the root cause is Covid, Ukraine, fuel prices or growing …. concerns …. in China.
Oh, and an added little delight to this already foul mix? We’re increasingly dependent on advanced computer chips for everything from cars to computers, and from TVs to industial process equipment, from climate control to medical research. The most advanced of that, currently, is in 7nm fabrication and guess where that is concentrated? Yup, the world’s largest fab, TSMC …. yup, in Taiwan. Sure the US is finally getting around to addressing how dependent they (and more so, we) are on the Far East and building (via Intel) home-grown 7nm fabs but they will be some years before they come online. Meantime …. well, cross your collective crossable bits, everyone, and hope China doesn’t explode. Metaphorically. I hope.
For the record, I think I managed to keep this on the economics, not the politics, and just how interlinked it all is and why no current economic model will model what’s going on, because it’s never seen the likes of the perfect storm we’re currently in. It has no data to even start projecting possible or probable outcomes of all this.