First we have Britian's Coming Credit Crisis
- Steep housing prices and a dependence on financial services make its economy vulnerable
- Could any country be more exposed to the current credit crunch than the U.S.? You bet, and that place is Britain. Unlike most of its European neighbors, Britain shares many of America's financial traits—and problems.
- Access to cheap credit has fueled a decade of unprecedented growth, with home prices tripling over the past decade, a faster rise than in the U.S.
- Consumer spending has skyrocketed, now making up roughly two-thirds of the country's total outlays. And the overall economy in Britain is more dependent on financial services than it is in the States.
- Roughly half of Britain's growth in the last 18 months has come from financial and business services—everything from accounting and legal advice to real estate. Together these sectors bring in 30% of Britain's national income, far more than in the U.S., says Peter Spencer, an economics professor at the University of York.
- If a fall-off in financial services were to put the brakes on leveraged buyouts, mergers, acquisitions, and offerings of credit derivatives, thousands of jobs could be lost, primarily at banks, brokerages, and other financial outfits, the Centre for Economics & Business Research Ltd. estimates.
- As in the U.S., consumers are another key driver of the economy—and today they're among the most indebted in the world. British consumers owe $2.7 trillion on credit cards, mortgages, and other consumer loans—or more than the country's entire economic output. Household debt as a percentage of gross disposable income is 166%, compared with 127% in the U.S. So it's hardly surprising that in the past year, British banks have had to write off $18 billion in bad debts, mostly consumer borrowing.
- Such write-offs could be just the beginning if housing prices start to fall. Despite little growth in incomes, consumer spending has remained strong as Britons have borrowed against the rising value of their homes. That shouldn't be a problem if housing prices climb an additional 40% over the next five years due to supply constraints, as predicted by the National Housing Federation, an affordable-housing advocate.
- With the average home now costing $370,000—roughly 11 times the average salary—housing is less affordable than at any time in the past 15 years. The latest data show house price inflation running at about 9.5% annually for the month of August, but the rate is starting to slow. And in Yorkshire, Wales, and other areas, prices are even falling.
- Foreclosures and personal bankruptcies are up by 30% in the first half of 2007, compared with the same period last year.
- Although most believe that the Bank of England is unlikely to raise rates further anytime soon, the cost of servicing mortgages is expected to climb. That's because the crisis in the financial markets has raised the cost of borrowing for lenders, who will in turn pass on those costs to consumers, many of whom have adjustable rates. Subprime mortgage rates have risen by as much as 2.5 percentage points this summer. Although subprime debt accounts for about 10% of the market in Britain, compared with 25% in the U.S., the growing popularity of so-called self-cert loans, where buyers don't need to present proof of income, is on the rise. Some brokers estimate that they account for one-third of new mortgages issued in the past year.
Takeaways: Some interesting stuff. I was not quite aware of just how levered to financial industry the UK economy was. With far fewer cities than the US, London obviously has a greater pull on the country as a whole relative to NYC does to the US. So from that perspective it makes sense. While subprime mortgages do not make up as large of a % as in the US of late, I was surprised to see this same behavior (the no doc loan) appearing over there. From all I have read most of the European mainland banks have been quite conservative in their mortgage lending ways, but obviously the UK has disassociated itself from the main EU. Household debt as a percentage of income is also troubling, as is the home affordability issue. With that said, 1 main difference than can buoy housing to some degree is the lack of undeveloped land in the country versus the vast landscapes of America. Anyhow will be interesting to see how things play out across the pond as their central bank seems to be jawboning things in a much more 'tough talk' scenario versus what the Fed has shown thus far.
