Weakened Banks and House Price Forecasts
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Trading Features / Strategies from Simon Denham of Capital Spreads.
The ‘vulture funds’ appear to be sniffing around the smaller banks and weakened Boards are struggling to justify not talking to them. Although the term ‘smaller banks’ now seems to encompass rather more units than a few months ago.
Bradford and Bingley's curious attitude to their shareholders over the past month coupled with their outright rejection of a deal that seems, on the face of it, to be rather better than the one they have agreed will mean that their days are likely to be numbered no matter who wins out.
Continuation of the ‘Buy to Let’ and ’Self Certification’ mortgage models well past the stage where the risk/reward equation over comfort levels became stretched beyond good sense, making numerous slightly misleading (shall we say) statements about capital requirements, capitulation over the original rights issue at 82p, hasty acceptance of a Goldman Sachs inspired ‘fire-sale’ to TPG followed by rejection of any alternative deal must leave the overriding premise of a fiduciary duty to shareholders looking a tad tatty around the edges.
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With everyone and his dog coming out with ever more dire forecasts on house price movements the temptation for a mortgage based operation to make irrational decisions to redeem a current problem is probably quite high. Unfortunately the worries are hardly likely to reduce in coming months and the jobs situation remains the overall imponderable. Current trends would indicate that the majority employers are looking at best to be in a hiring freeze and at worst we could be seeing 5-10% headcount reductions. A worst case scenario would see over 300k added to the economically inactive pile which would presumably see a heavy increase in mortgage arrears and house repossessions. Having to make a forced sale in the current environment cannot be a happy experience but it will probably be easier now than next winter.
The complaint that industry has levelled at the ‘forth estate’ over talking us into a recession might well be raised again over Property values. If I was looking to buy a house now I would just knock 25% off the ask price on the basis that this is where forecasters expect the market to be in a years time. Presumably I would be paying a Mortgage (probably around 7.5%) during that time, have paid 2 to 5% stamp duty on the deal plus numerous other house purchase related fees. If the market did indeed drop as expected a purchaser at current levels could easily be looking at an overall negative cash/asset position of some 30-35% by next summer with all costs included. Not nice.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Weakened Banks and House Price Forecasts' edited by SD, updated 25-Jun-08
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