Thursday, November 16, 2006

UK: Banks told to predict effects of a 40% crash in house prices

by Bill McBride on 11/16/2006 01:14:00 AM

From The Times: Banks told to predict effects of a 40% crash in house prices (hat tip: Kevin)

BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
[Clive Briault, the FSA’s managing director for retail markets] warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
And from the Business Online: House prices most overvalued since 1948
BRITAIN’S housing market is more overvalued than at any time since 1948 as buyers compete to snap up scarce properties, according to Dresdner Kleinwort.

The research will fuel fears that easy credit is inducing buyers to pay too much when buying their homes and over-stretch themselves financially.
The ratio of house prices to disposable incomes typically peaks at more than six times, the analysis reveals. On this measure, peaks in the housing market were seen in 1948, 1973, 1988 and 2006.

The current ratio is higher than in all previous episodes apart from 1948, when private homes were very scarce after the second world war.

David Owen, an economist at Dresdner Kleinwort, said: “There was an earlier period when inflation and interest rates were both low and the UK housing market was as expensive as it is today: the late 1940s. As in other housing corrections house prices then fell in real terms by over 30%. They also fell in nominal terms.”

After each previous peak, house prices went on to fall sharply in real terms, usually by more than 30%.