Britain (and Europe’s) Economy Are Stuck

Take a typical British house today costing £160,000.  To buy you need a deposit of 25% or £40,000.  Banks know that property prices could crash as they have in the USA,  by 40% from their peak prices.  In the UK prices are only down by about 10% so far.  If prices fell further, banks who repossess would still face a potential loss even after taking a 25% deposit.  Repossessed houses sell for far lower prices at auction.

Result – banks are unwilling to lend.
Take the situation after a crash has happened, where the same house might be valued at say £120,000.  A deposit of £30,000 would be far easier to raise for a buyer.  The bank would know that the house price cannot fall much further, and would feel safe lending the money, as the deposit would cover any fall in value.
As banks are not lending because prices are likely to fall, it will be better for the fall to happen and get it out of the way.  Economies always bounce back after a crash.  The problem is now that no one is buying, and few can sell.  It’s a classic situation where a price fall would benefit all parties.  Even sellers would know where they stood, instead of holding out for an unachievable price for years on end.
Why doesn’t everyone agree overnight to cut house prices by one third?   Who would lose?  The seller could get a better house cheaper as well.

The crash is coming anyway.  Why not get on with it?  All these stress tests and bail-outs are only delaying tactics.  I own a few houses, but I don’t care.  Less inheritance taxes to pay.

Reports show that banks have less money ………

Open Europe –

The Telegraph notes that a new report from credit rating agency Standard and Poor’s has found that European banks have amassed €30 trillion in liabilities and now face a serious funding threat over the next two years as emergency support is withdrawn. Total liabilities are €23 trillion for the eurozone and €8 trillion for the UK, Sweden, and Denmark. The report notes: “ECB loans have contributed to a shortening of liability maturities. The result is a growing funding mismatch for the European banking industry”.

French daily La Tribune also cites a report issued by the ECB showing that “negative spillover effects from the [eurozone] sovereign debt crisis appear to have worsened banks’ ability to obtain funding”.
In his column in FT Deutschland, Wolfgang Münchau argues that with a stricter definition of ‘core capital’, German regional banks (Landesbanken) would have failed the stress tests and writes: “I don’t have the slightest doubt that the German banking system is in pure economic terms not solvent any more”.

….and that consumers are less willing to borrow.

WSJ – Latest news on coming decline –

According to the survey, consumers are sharply more pessimistic about the economy in general and about their own financial situation in the coming year.
“Given that consumer confidence measures are normally good predictors of what the economy itself will do a few months later, the continuing slide in the index makes a double-dip recession look more of a possibility as each month goes by,” said Nick Moon, managing director for Gfk NOP.
Fears over jobs and earnings also led to the first monthly decline in U.K. house prices in five months, according to U.K. lender Nationwide.
Its monthly survey showed house prices fell 0.5% on the month and rose 6.6% on the year in July. That compares with June’s unchanged monthly outturn and 8.7% annual increase. Economists had expected no change for the month and a 6.9% year-on-year gain.
“A combination of restrictive credit conditions and uncertainty about the future economic outlook continues to limit the pool of buyers to those with relatively large financial resources,” said Martin Gahbauer, Nationwide’s chief economist, adding that the outlook for house prices remains mixed.
But Bank of England lending data for June reported a second straight decline in the number of mortgage approvals–to 47,643, the lowest level since February. A slowdown in the amount homebuyers borrowed point to further price falls as well as fewer sales.
The Tap Blog is a collective of like-minded researchers and writers who’ve joined forces to distribute information and voice opinions avoided by the world’s media.

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