Monday, September 17, 2007

That Maestro, Always Ahead of the Curve

by Tom Bozzo

Deeply buried in a story on the continuing Northern Rock bank run in Britain:
In an interview published Monday in The Daily Telegraph, former U.S. Federal Reserve Board chairman Alan Greenspan warned that Britain was susceptible to some of the problems now roiling the U.S. real estate market.

"Britain is more exposed than we are — in the sense that you have a good deal more adjustable-rate mortgages," he said.
Some of us do recall that Greenspan was hawking ARMs to U.S. house buyers not too long ago — and not long at all before the Fed Funds target rate began its latest upward march.

Meanwhile, it might not get such prominent play over here, but the UK's housing bubble-like event makes the U.S. housing situation look trivial by comparison.

To make an exchange rate-free comparison, the average house price in the US is in the ballpark of 4.5 times average household income. The average price in the UK is around 7 times UK average household income. So the average house price the UK would need to fall 36 percent just to get to the same not-necessarily-sustainable position, relative to income, of the US.

This sort of thing makes the UK look like a huge subprime bomb waiting to go off, since lending excessive amounts of money to the hitherto-creditworthy has many of the risks of lending to the relatively uncreditworthy. Good luck, Bank of England!

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That's some crazy stuff - nice blog!
The other factor that used to be true is that UK mortgages were customarily taken at 100% LTV. (No benefit from putting 20% down, or--more accurately--no cost in not doing so.)

I'm thinking of an Investment Bank that spent much of its European FI effort over the past two years expanding heavily into the UK market, despite having a very limited presence there otherwise. (There may be more than one correct answer.)

Don't get me started on Greenspan talking (and managing to) his portfolio...
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