Fair to work out property yield based on multiple sources?

The Mad Rapper · 7 Mar 2008 at 15:09

daz said:
I still don't see how it's going to be the end of our monetary system.

Because that system is breaking down. When banks owe more then they possess in capital reserves as they do now (that's actually the way banks have been allowed to work) then they either go bankrupt, get supported by the Government (Nothern Rock) or get bought out.

The problem is that ALL banks owe more then they possess in capital reserves, the security for that debt has been held in CDOs (basically repackaged mortgages) which are now close to worthless.

Added to that, the companies who provide insurance for these CDOs haven't got anywhere near enough in capital reserves to cover their insured exposure. In English, they are ******. That's why the three big US Bond insurers have just about gone under.

Does that explain it to you any better?

EDIT:

Another example of this is that the FSA has told the banks to increase their capital reserves, so that's why all the mortgage, loan and credit card rates are now far less competitive than they were. The banks have lost billions and they need to get that money back somehow. Only this week HSBC posted a £16 billion loss due to CDOs and other exotic finance vehicles. That money has to be repaid.

It'll be the tax payer that foots the bill for this as usual; profit is privatised, debt is socialised.

daz · 7 Mar 2008 at 15:16

The Mad Rapper said:
Only this week HSBC posted a £16 billion loss due to CDOs and other exotic finance vehicles. That money has to be repaid.

AFAIK it's not a capital loss, it's a revaluation of their assets.

Because that system is breaking down. When banks owe more then they possess in capital reserves as they do now (that's actually the way banks have been allowed to work) then they either go bankrupt, get supported by the Government (Nothern Rock) or get bought out.

It's only a problem if there's a run on the bank, i.e. everyone needs their money in physical form all at the same time. Northern Rock wouldn't have needed to be nationalised if the media hadn't played their part in the run on the bank.

The Mad Rapper · 7 Mar 2008 at 15:22

daz said:
AFAIK it's not a capital loss, it's a revaluation of their assets.

Of course it's a capital loss. The banks borrow money from the wholesale markets which they then lend to mortgage applicants. Those mortgages are then packaged as CDOs and sold on. Banks buy other banks CDOs as well which makes this even more complicated. The money borrowed from the wholesale market has to be repaid regardless. If the CDOs are then worthless the investors still have to be repaid from the banks capital reserves. I don't think it's right therefore to view a worthless debt obligation as an asset.

I could be wrong though.

daz · 7 Mar 2008 at 15:26

Interestingly enough...

HSBC, the UK's largest bank, has said it has made a $17.2bn (£8.7bn) loss after the decline in the US housing market hit the value of its loans.

But its annual profits still rose 10% to $24.2bn (£12.2bn), up from $22.08bn the year before.

Whilst the credit crisis, caused by problems in the US housing market, hit HSBC's US operations, the bank enjoyed strong growth in Asia, Middle-East and Latin America.

"For HSBC to achieve another new high in earnings despite these conditions... underscores the value of the strategic focus... to drive sustainable growth by concentrating on the fast growing markets of the world," Mr Green said.

HSBC said the banking group was fundamentally strong and it increased the dividend it pays to shareholders by 11% to 90 cents per share.

http://news.bbc.co.uk/1/hi/business/7274385.stm

Doesn't seem quite so gloomy.

Third Opinion · 7 Mar 2008 at 15:31

Maybe if all estate agents close their eyes and wish hard enough, falling prices and a property crash will go away.

Read the news, the buy now pay later economy has hit a stumbling block. No more cheap money to borrow. Gordon's miracle has come home to roost.

Stinky · 7 Mar 2008 at 15:37

Third Opinion said:
Maybe if all estate agents close their eyes and wish hard enough, falling prices and a property crash will go away.

Read the news, the buy now pay later economy has hit a stumbling block. No more cheap money to borrow. Gordon's miracle has come home to roost.

do you trust everything you read?? i really hope not

Mad old tory · 7 Mar 2008 at 16:18

The Mad Rapper said:
Because that system is breaking down. When banks owe more then they possess in capital reserves as they do now (that's actually the way banks have been allowed to work) then they either go bankrupt, get supported by the Government (Nothern Rock) or get bought out.

How on earth are banks supposed to make money if they can't lend based on reserves? They won't go bankrupt etc, because they don't have to suddenly provide all of their depositors all of their money. That's how the banking system has always worked, otherwise there would be no liquidity and no profit. Banks have to deposit 10% of their reserves with the BoE as this liquidity ratio is judged as being sufficient to allow any depositors who wish to, to withdraw their money while still allowing the bank to lend to others.

Jay_t · 7 Mar 2008 at 16:34

Mad old tory said:
How on earth are banks supposed to make money if they can't lend based on reserves? They won't go bankrupt etc, because they don't have to suddenly provide all of their depositors all of their money. That's how the banking system has always worked, otherwise there would be no liquidity and no profit. Banks have to deposit 10% of their reserves with the BoE as this liquidity ratio is judged as being sufficient to allow any depositors who wish to, to withdraw their money while still allowing the bank to lend to others.

That's how it's always worked in sensible times. In the last few years of madness they were making 125% LTV loans to poor people, taking the commission, packaging them up and selling them on. These securitised mortages were risk free to the bank, it might as well have been 1250% LTV on 10x income and self cert. Because these loans didn't go on the balance sheet and 10% BOE deposit wasn't needed, they didn't care.

What happens to the poor folks who were told "houses only ever go up" and just paid over the odds for their first home. Now banks take the risk again and will all soon be going back to 3x income. When the first time buyer house goes back to 3x income again, it is going to be carnage for people who have just bought.

aardvark · 7 Mar 2008 at 16:55

you would have to be insane to buy a house now, especially as an investment. Houses are falling in value and its only just started. BTL's are going to be bankrupt by the end of the year - i'm actually looking forward to it

Stinky · 7 Mar 2008 at 16:59

aardvark said:
you would have to be insane to buy a house now, especially as an investment. Houses are falling in value and its only just started. BTL's are going to be bankrupt by the end of the year - i'm actually looking forward to it

where did you get that info from? about BTL's going bankrupt??

not arguing , just havent heard that one before

aardvark · 7 Mar 2008 at 17:05

Stinky said:
where did you get that info from? about BTL's going bankrupt??

not arguing , just havent heard that one before

because of this ridiculous culture where people believe that the easy was to get rich and make money is to borrow huge amounts of money and get a BTL - what could possibly go wrong??? Once the credit crunch starts warming up and lenders have no choice but to raise interest rates all these people are going to be repossessed. Just wait and see.....

Stinky · 7 Mar 2008 at 17:06

aardvark said:
because of this ridiculous culture where people believe that the easy was to get rich and make money is to borrow huge amounts of money and get a BTL - what could possibly go wrong??? Once the credit crunch starts warming up and lenders have no choice but to raise interest rates all these people are going to be repossessed. Just wait and see.....

not at all. i belive that the landlords will simply but the rent up to accomidate the increase in rates. and a lot will have fixed terms anyway.

i cant see what you are saying happening anytime soon at all. my thoughts only of course

Mad old tory · 7 Mar 2008 at 17:09

I think there are a lot of extreme views in this thread. Holding off from buying for a bit is quite sensible advice. Arguing that prices are going to fall to 50% of their current value is just wishful thinking though imo. Similarly, no doubt some BTLs will get their fingers burnt but I would be surprised if most sensible landlords were not able to ride it out.

spud999 · 7 Mar 2008 at 20:20

Remember a house price crash takes many months/couple of years to really kick in- it dosent happen overnight- first distressed sellers will start puling the market down and the rest will gradually follow.

The Mad Rapper · 7 Mar 2008 at 23:28

Mad old tory said:
Arguing that prices are going to fall to 50% of their current value is just wishful thinking though imo.

You are so wrong.

Prices have risen more than 200% in ten years, what makes you think that prices cannot fall by the same amount in the same period of time?

Alasdair · 8 Mar 2008 at 02:12

The Mad Rapper said:
When banks owe more then they possess in capital reserves as they do now (that's actually the way banks have been allowed to work) then they either go bankrupt, get supported by the Government (Nothern Rock) or get bought out.

No they don't. You have to realise that banks do not work on the assumption that all of their assets need matched with a corresponding liability on the balance sheet.

The Basel II accord allows for banks to reduce their capital reserves by way of prudence in lending and a more accurate reflection of likelihood of default and expected losses. A simple example was that UK banks previously had to hold 8 per cent at the Bank of England, however those that have achieved advanced status under Basel II can reduce that, I believe to something approaching half that.

Northern Rock failed not because of its business model, which was sound, but because of the way in which their liquidity problems were sensationalised to the point of causing a run on deposits. This coupled with the increase in Libor due to the tightening of the credit markets caused their failure and it has nothing to do with their lending practices. I believe that their write-downs for bad debt are around the same as other banks, there's no flaw in their actual business model, only their access to cheap liquid borrowings.

The Mad Rapper said:
The problem is that ALL banks owe more then they possess in capital reserves, the security for that debt has been held in CDOs (basically repackaged mortgages) which are now close to worthless.

Not all debt is securitized in CDOs. Even then, the CDO market has only really been affected by valuation issues where sub-prime debt has been packaged with gilts and other high-grade securities giving a false picture of the worth of a fund. The market exists, as do the funds, however their value and saleability has been tarnished but not destroyed as you say.

al

Andrew_McP · 8 Mar 2008 at 07:20

Alasdair said:
I believe that their write-downs for bad debt are around the same as other banks, there's no flaw in their actual business model, only their access to cheap liquid borrowings.

Yes, but that cheap (global) liquidity was provided by the corrupt and corrupting policy of selling on debt, often repeatedly. Ok, NR were only taking advantage of that widespread financial practice to grow (too) rapidly, and as such there was 'nothing wrong with it'. But by failing to envisage a time when -- inevitably -- the buck would be passed once too often, the NR board failed to protect their business.

To me that makes their business model flawed. By saying, as they did, "we didn't think this could happen" they proved they were unfit to run the business. You always need a back-up plan in business, and theirs was to look down the back of the sofa.

It was, IMO, shameful. Almost as shameful as the way governments and regulators around the world have allowed this farce to get to the point -- quite literally -- of no return.

Andrew McP

Third Opinion · 8 Mar 2008 at 08:18

Stinky said:
do you trust everything you read?? i really hope not

Ahh it's a conspiracy is it?

There was me thinking that Northern Rock had to be nationalised. Reposessions were indeed up, credit crunch was pushing up the Libor rates, Nationwide and Halifax were reporting falling prices, 1 in 5 surveyed think they will struggle to pay their mortgages when their deal ends this year.

Stinky · 8 Mar 2008 at 11:23

Third Opinion said:
Ahh it's a conspiracy is it?

There was me thinking that Northern Rock had to be nationalised. Reposessions were indeed up, credit crunch was pushing up the Libor rates, Nationwide and Halifax were reporting falling prices, 1 in 5 surveyed think they will struggle to pay their mortgages when their deal ends this year.

Northern rock where only nationalised after everyone tried taking there money out, after the media stepped in, if nothing was reported then they would not have had problems.

reposessions are up, but this does not mean that prices will fall. As for people not being able to afford mortgages it doesnt help that all utility prices are on the rise!

beamer · 8 Mar 2008 at 11:49

Stinky - Is there anywhere outside of London you would recommend BTL investing ? I have some capital, but not sufficient to meet the deposit required for the high-end London properties, so I am looking at high-end non-London properties, which are more do-able.