The Reality Gap

From the BBC:

House sellers have dropped their asking prices for the second month in a row, the property website Rightmove says.

Sales have been held back by the reality gap in the market, with asking prices rising for most of this year while selling prices have been flat. However, Rightmove says asking prices dropped by 2.1% this month after a 1.6% fall in July. The average asking price of £231,543 is now 14% higher than the average £203,528 selling price. That selling figure comes from the government's own monthly house price survey, produced by the Department for Communities and Local Government (DCLG).

The gap between asking prices and selling prices is even wider if data from other house price surveys is used. The Halifax puts the cost of the average home at £163,981, and the Nationwide puts it at £168,731, so sellers and their estate agents could be overpricing their properties by as much as 41%.

I must admit to being eternally puzzled by the discrepancy between the average house price of about £165,000 according to Halifax, Nationwide, HM Land Registry and HM Revenue & Customs; and the average price of over £200,000 according to DCLG and Rightmove.

For sure, Halifax and Nationwide don't include cash sales, but:

a) HM Land Registry and HM Revenue & Customs certainly do. That's joined up government for you, I suppose, and

b) Is it really plausible that cash buyers would outbid mortgage buyers by £40,000? I thought the whole point of being a cash buyer was that you can slightly underbid, but your offer is still likely to be accepted because there is less messing about.

Separated at birth (3)

Banking regulator goes over to the opposition

From the Evening Standard:

The man in charge of the taxpayers' shareholdings in high street banks today warned that any break-up (1) of Royal Bank of Scotland or Lloyds would damage their value. (2) "There would likely be a diminution in value," Sir David Cooksey, chairman of UK Financial Investments which looks after the taxpayers' £67 billion stake in the banks, told MPs on the Treasury Select Committee...

Budenberg also said bonuses for chief executives and key staff were vital in keeping top talent and to maintain value at Lloyds and RBS. (3) He told the committee: "I understand that it is very difficult to justify the sort of bonuses paid at these banks. (4) But if we want to sell these shares, we have to make sure the banks are able to retain top talent. We believe it is essential to maintain high quality management at these banks. They will effectively determine the outcome of value at the banks."

... The taxpayer is currently sitting on a paper loss of around £9 billion for its RBS and Lloyds shares. (5)

1) It is never clear what 'they' (whoever 'they' are) mean by 'break up':

a) Some mumble along about splitting up 'investment banking' (which is hugely profitable for the insiders, they are all con-artists and spivs, separate issue) from 'retail banking' (which is where all the losses were made, i.e. reckless lending on over-priced land and buildings). What really did for them was the inter-bank lending, whereby banks bought each other's mortgage backed crap, but that can be fixed quite simply making it illegal for banks to invest in or lend to other banks. Which is dead easy to implement and actually quite effective. No break up required!

b) Or do they simply mean splitting banks into smaller banks, i.e. Lloyds back into Lloyds, TSB, Halifax and The Leeds? If there are lots of competing smaller banks, it is in theory better for the general public, but the question is how many competing banks you need to maximise the benefit for the consumer - is it four, six, ten, twenty? Who knows? And the more competing banks you have, the more duplication there is of admin costs, which benefits nobody.

2) Hang about here. I'm a taxpayer and a bank customer. They could quite easily maximise the value they get for me qua taxpayer (to the extent that the government doesn't just piss the proceeds up the wall anyway) by e.g. merging Lloyds and RBS and withdrawing banking licences from Barclays, HSBC, Santander and Standard Chartered. But then my losses qua consumer would far outweigh the benefit I get qua taxpayer, wouldn't they (not to mention the losses suffered by investors in those other banks)?

3) The geniuses who got us into this mess? The simple fact is that running a bank isn't that difficult and does not require superstar salaries. The Nationwide has been managed rather less badly than most banks, and their entire board of directors took a total of £8 million in salaries and bonuses for 2010 (see 2010 accounts, page 66) and their 18,350 other employees were paid £584 million between them, i.e. an average of £32,000 each. which is a decent wage, but chicken feed compared to other banks, such as...

RBS, where the "aggregate remuneration of directors and other members of key management" was £48 million (2009 accounts, page 346) and its 183,700 employees (page 108) were paid £9,635,000,000 (page 281), an average of £52,450 each.

4) No it's not 'difficult'. Taking off a wet suit in a telephone booth is 'difficult'. The word he is looking for is 'impossible'.

5) The £67 billion is a sunk cost, the £9 billion paper loss is a sunk cost. The previous government almost certainly overpaid - they could have let the banks sort themselves out at zero cost to the taxpayer with debt-for-equity swaps - but what's done is done. They've lost £1,000 of my money already, and I see no reason to throw good money after bad. If they now make a paper loss of £9 billion (or £67 billion) but structure these banks in such a way as to minimise the costs to consumers (who are synonymous with 'taxpayers') by more than £9 billion (or £67 billion), then go for it, say I.

Instant Tradition

Halifax Bank, now part of Lloyds Banking Group, used to publish its monthly house price data in the first couple of days of the subsequent month, but two years ago, when house prices had started falling, they decided to postpone the release until the early morning of the day on which the Bank of England's Monetary Policy Committee finalised its decision on interest rates (usually the first Thursday in the month).

The logic was, in case the MPC were wavering, that 'bad' news on house prices would stampede the MPC into cutting rates and/or keeping them low. This tactic seems to have worked, and once house prices went into the dead cat bounce, the Halifax reverted to releasing the figures a few days earlier.

House prices had sort of flattened off over the past few months, but you could have guessed that Halifax' September house price statistics would be 'bad' because they delayed them until today, the day on which the MPC solemnly announced that it would keep the base rate (a largely meaningless figure) at 0.5%.

BTW, that 3.6% monthly fall (while probably wildly overstated) brings back the average house price, not adjusted for inflation, to the same level as September 2004, i.e. six years ago (from tab 11 of their Excel sheet).

The onslaught resumes

Now that the new lot have their feet firmly under the table, the onslaught of government sponsored advertising on the telly appears to have started again.

I've been watching Channel 4 and ITV for the past couple of hours and saw one for Barnardo's and one to remind you to renew your Tax Credits. And one for a state-owned bank, Halifax, in which a woman drops a cup of coffee, an idea which they might have pinched from the Microsoft advertisement, in which a woman knocks over a cup of coffee.

All links to TellyAds.com, who don't appear to have the up-to-date Tax Credits propaganda - so I linked to the more repulsive of the two available. Thanks to Pavlov's Cat for alerting us to this most useful resource.

While I'm on the topic, here's my favourite ad of recent months: Am I dead? No, you're in Frinton-on-Sea.

Another day, another reckless throw of the dice (25)

From The Times:

HBOS, which is part of Lloyds Banking Group, will consider offering a new mortgage to customers in negative equity whose existing deal, such as a fixed rate, is about to expire.

Normally such borrowers would see the rate they pay revert to the lender's standard variable rate (SVR) and would be unable to remortgage if the new loan were greater than the current value of the property as a result of the decline in house prices.

But Halifax and Bank of Scotland, which are both part of HBOS*, are offering the rates on 95% loans to some remortgage customers needing to borrow more than the property value – up to 120% of the value in some cases.

* Allow me to insert the missing words: "Halifax and Bank of Scotland, which are both part of HBOS, which itself is part of Lloyds Banking Group which is 65% owned by the taxpayer..."

Hmm. I'm not convinced that this is the best use of taxpayers' money, but hey...

H/t QG at HPC.

Normal service resumed

From the BBC: "House prices drop 1.9% in March... according to the Halifax."

The point at which their index goes five-year-negative is tantalisingly close. Halifax monthly all-buyer non-seasonally adjusted figure for April 2004 was £154,433 and for May 2004 was £159,103; as against £157,066 for March 2009 (from table 13 of the Excel sheet here).

As I posted yesterday on the Nationwide figures "We may have to postpone five-year-negative until May 2009. NB, average price now =£151,000 ,average price in May 2004 = £149,000". I think their April 2004 was £147,000.

So both the Nationwide and Halifax indices will both go five-year-negative (non inflation adjusted!) in April or May 2009 at the latest.

UK banking crisis in perspective (2)

When I did my first round up of this in April 2008, I guesstimated the losses from reckless UK residential lending at between £28 billion and £50 billion.

HBOS has written off about £6 billion of residential mortgages so far (£3 billion last year, £3 billion this year) and house prices will fall at least another twenty per cent, so let's double that to £12 billion. HBOS also has around one-fifth of the UK mortgage market, but was at the more reckless end, so £50 billion looks 'about right'. At the time I made my guesstimate, nobody realised that there would be a government bail out. I'll give myself a bonus point because the amount they stuck in of £37 billion is pretty much in the middle of my range.

Just for fun, I reworked the table from my earlier post, if you divide their market capitalisation (as at April 2008) by their gross assets (as at December 2007), and then sort the rows in descending order of the result in column C, this ties in pretty well with how much their share price has fallen over the last twelve months (Standard Chartered is a blip). The 'Tier 1' capital ratios as at April 2008 (see earlier post) of these banks all looked pretty much the same, so in future we can dispense with 'Tier 1' ratios as being a complete fiction, somehow or other, the stock market knew perfectly well a year ago which banks were most likely to survive.

Anyways... the point of all this is that there are people who say that "banks are too big to fail"*.

Take it from me, they are not, the losses might well be a lot more than £50 billion, because then there's corporate lending, in which HBOS seemed to have excelled - at picking lousy risks - and also an unknown amount that UK banks invested in sub-prime crap from the USA and so on. So maybe the total losses will be £100 billion (around 7% of UK GDP, £1,500 billion). As at present, the balance sheet total of UK banks is around £6,000 billion, a ridiculously large figure because there is so much double counting involved. If you net off all the inter-bank stuff and assets/liabilities that are matched economically but not legally**, then their balance sheet total is more in the order of £1,500 billion.

So, without going into legal niceties, shareholders will be wiped out and up to 7% of their creditors (i.e. longer-term bondholders) will have to be paid in shares instead of cash, or will have to wait a bit longer for their money than they expected, or might not get much of it back. Such is capitalism, risk and reward and all that.

That's that fixed, next.

* Interestingly, people trot this out, whether they support the bail out or not, merely because they can't see an alternative. I wouldn't be surprised if the banks exaggerate their own balance sheet totals to make themselves seem more powerful and important than they really are. This is a bit like EUphiles and EUsceptics being broadly agreed that the EU is getting more and more powerful. It's not - it passed it's high water mark with the Irish 'No' and now they are flailing around trying to make it look like they are all-powerful, but they aren't. Of course we still need to keep kicking the EU until it's been snuffed out, but there's no panic any more, a more pressing issue right now is kicking the banks while they are down.

** For example, the bank has sold foreign currency forward to Company A and hedged its bets by buying the same currency forward from Banks B, C and D. Really, these two net off - unless Banks B, C and D welch on the deal and the spot rate has gone against them, the net asset or liability on these two position will always be a small profit. And accountants are very fussy about not netting stuff off, it went out of fashion a decade ago.

Official: House price crash over!

Well, according to The Halifax (part of HBOS, part of Lloyds Banking Group etc) it is:

"There was a 1.9% increase in average UK house prices in January, offsetting December's 1.6% decline. Prices in the three months to January compared to the preceding three months, which provides a better indicator of the underlying trend, were 5.1% lower."

As I said over at HPC:

For several months now, the Halifax timed their press release to come out just as the MPC were making their final deliberations on base rate changes, presumably in the vague hope of stampeding them into a rate cut, which appears to have worked 'well' so far.

But has the strategy worked 'too well'???

Presumably, LloydsHBOS are now suffering from all the tracker mortgages they doled out at base rate plus/minus nothing and have decided to go on the other tack, and to make sure that the MPC don't cut rates this time. Hence the earlier-than-normal-release and the highly dubious assertion that prices have gone up.

I'm not impressed, not impressed at all.

Does this surprise anybody?

Shock, horror:

...HBOS has come out with a warning that bad debt provisions for the current year will top around £8 billion which is nearly half of the £15.5 billion of emergency capital raised earlier this year.

*sigh*

1. About a fifth of UK residential mortgages are with HBOS and I estimate the total losses to UK banks thereon at £40 billion, a fifth of £40 billion is £8 billion.

2. These are provisions, not actual losses, which may turn out to be a bit more, or indeed less. Then you can add on stuff for lending to businesses and investments in US sub-prime rubbish and so on.

3. It's hardly headline news if they end up losing all their emergency capital - that's why they raised it, n'est-ce pas? Seeing how difficult/expensive this is, you'd expect them to raise just enough to cover their losses, so it's reasonable to expect them to actually lose it all as well.

*/sigh*

Another day, another desperate throw of the dice (10)

From an article in The Times, uncovered by Drewster and Sold Out over at HPC:

The Financial Services Authority said yesterday that more than half a million Halifax customers on tracker mortgages should benefit from further interest rate cuts even though the small print on their loans supposedly prevents them from doing so...

Jon Pain, the FSA's retail market manager, said yesterday that this 3 per cent threshold, or “collar”, could be unenforceable. He said collars should be included in a lender's key facts illustration (KFI) - the mortgage documents given to every borrower. Halifax removed the details of its collar from its key facts in 2005.

That would be bad enough ... but what's this?

It emerged yesterday that the removal of details of the tracker loan collar from the Halifax mortgage key facts in 2005 was the result of concerns that the FSA raised over the complexity of the Halifax's mortgage documentation. The regulator was worried that the 11-page key facts statement was overblown for a document designed to highlight the key elements of the loan, and asked for it to be trimmed back. The collar detail was one of the items removed and relegated into the smaller print of the larger mortgage document.

Fun with numbers (6)

"Plunge in house prices outstrips the crisis of the 1990s" blares The Independent.

A good start, but then they let themselves down with sloppy maths and logic:

The crash in house prices is now the worst ever in Britain. HBOS ... will publish figures next month showing that the decline from last year's peak now exceeds the fall during the 1990s. From the top of the market in May 1989 to the bottom in February 1992, the bank's seasonally adjusted index of prices fell by 13.1 per cent. That fall has already been exceeded since the market peaked last August. So a slide that took nearly four years in the last recession has been repeated in just 13 months – and shows no sign of stopping.

1. Using Nationwide figures, the nominal/non-inflation adjusted peak was Q31989 and the absolute bottom was Q51995 - that's over six years, not "nearly four years".

2. The nominal fall was 17%, not "13.1%". Anybody who quotes averages of averages to anything more accurate than one per cent is a fool anyway.

3. The inflation adjusted fall last time was 37%. The inflation adjusted fall so far must be about 18% - a fall of more than 13.1% nominal (from the article) plus 5% RPI inflation. So we're achieved - in one year - half as much as we did in the six years 1989 to 1995.

Sorting out the credit crunch (3)

The Lloyds-TSB/HBOS merger is of course another way of doing it...

The problem with banks and financial institutions, as I explained here and here, is the double- and treble counting of losses. They all know that there will be losses, i.e. mortgages at vast multiples of income secured on houses that are falling in value, but because the mortgages have been repackaged and sold on so many times, nobody in the chain knows who end up taking it on the chin, so we end up with half a dozen different counter-parties all fretting about the same underlying loss, and all facing tumbling share prices and credit rating downgrades (outside investors in turn don't know which parties in the chain will be worst hit).

In part 2, I suggested that the various counter-parties divvy up the loss between themselves and get on with their lives, but of course the horse trading might drag on a bit. Especially if you end up with people who don't really have a culture of negotiating sensibly and honourably.

So here's Plan B - if all the banks, hedge funds and Sovereign Wealth Funds etc in the whole world were to merge into one mega-bank, they can net off the intra-group assets and liabilities (counter-party risk within a group is effectively nil) and there wouldn't be a "lack of trust" issue. The underlying losses - defaults by mortgage borrowers is the same, that won't go away - but there would be no double- and treble counting.

There'd still be bickering over who gets how many shares and bonds in the combined entity in exchange for shares and bonds in the entities being taken over, but that can be taken step by step. Clearly, a single global bank is not a good idea from a competition point of view, but I guess that you'd reach the same result with four or five.

I doubt that the various Monopolies and Mergers Commissions or protectionist gummints around the world would agree with this, but hey, they are part of the problem, not the solution.

"House prices fall by £20,000"

... was the original headline to this article in the Daily Mail, which originally just summarised the Halifax June House Price Index.

The revised headline is "House prices falling at fastest rate for 50 years - and interest rates won't be cut until 2009", and the author Becky Barrow has actually done a few minutes research, as evidenced by the first few sentences:

The price of the average home in Britain has plunged £17,000 since January, devastating figures revealed today. House prices are falling at a rate not witnessed since records began in the 1950s, according to the report from the banking giant Halifax. This suggests the current meltdown is even worse than the previous house price collapse in the 1990s.

So hopefully we'll see an end to the boring and misleading comments about 'worst house price falls since the 1990s' and start hearing phrases like '... in living memory' or '... since records began' or, for that matter, '... ever'.

Tee hee!

In the cosy world of The City of London, the top boys just shovel piles of (shareholders') cash at each other, e.g. when banks are issuing shares, they even appoint other banks as 'advisors'. There is a practice called 'underwriting new issues', whereby Big Investment Bank is promised oodles of issuing shareholders' readies in exchange for a vague promise to pick up any shares than the issuer can't sell in the market. And Big Investment Bank uses that cash to pay eye-watering boni to its senior employees; shareholders in Big Investment Bank don't see much of it.

Without going into technicalities, it looks as if Morgan Stanley and Dresdner Kleinwort have finally been hoodwinked by HBOS. For the first time in ages, underwriters might actually made a loss on a deal. In which case, the shareholders in Morgan Stanley and Dresdner Kleinwort's parent, Dresdner Bank AG are the ones being robbed.

Nice one, Andy Hornby!

H/t Fubar at HPC.

Barclays to raise £3 bn ... and then some

As predicted here, Barclays are next in line for a rights issue.

The amount does seem on the low side, it's less than 10% of current market capitalisation of £31 billion, as opposed to my ball-park figure that banks will have to raise approximately 20% of their current market cap.

Remember also that Barclays' gross assets of £1,227 billion are roughly double those of HBOS (£667 billion - see page 11); so Barclays will only get away with this if the fraction of assets that they have to write off is less half that of HBOS, who are to raise £4 billion shortly.

Fun with numbers (3)

According to the Halifax House Price Index, the average house price in April 2007 was £196,252, and in April 2008 it was £189,027 (see page 4 of 4). They reckon that's a fall of 0.9% year-on-year.

Er ... £189,027 divided by £196,252 is 96.3%. Isn't that a fall of 3.7%?

Or put it this way; the average price in August 2007 was £199,600, so prices have fallen 5.3% in 7 months, that's about 9% annualised. So there.

"HBOS will attempt to raise £4bn"

As I calculated before, UK banks will have to have rights issues of about £1 for every £5 market capitalisation.

HBOS is now going for a £4 billion rights issue, against a current market capitalisation of £18 billion.

As a rough guide, you can assume that the next to do rights issue will be those with the lowest ratio of market cap-to-gross assets, i.e. Barclays, Alliance & Leicester and Bradford & Bingley.

HSBC and Standard Chartered look pretty 'safe' for now; Lloyds TSB is borderline.

"Brown seeks to calm housing fears"

"The sub-prime minister said a 2.5% fall in March, recorded by the Halifax, should be seen in the context of 10 years in which household debt had trebled from £500 billion to £1,421 billion"

"Bank of England rescues HBOS from brink of collapse..."

There's no smoke without fire.

Whether there was any truth in the rumours; whether this was ruthless insider trading; or whether it was blatant market manipulation is neither here nor there. The fact that so many chaps at the Stock Exchange were prepared to believe them speaks volumes.