Britain: The housing tsunami

Up till recently, Britain’s main high street banks had not seemed to have suffered much – they were all announcing big profits and there was little talk of large ‘writedowns’ of worthless assets. But now the Royal Bank of Scotland has announced that it lost £4bn in the last three months as a result of the world’s great credit crunch and it must write off £5bn in loans and debt securities that it had on its books as worthless. The credit crunch is going to hit Britain in a big way.

As I write, Britain’s second-largest bank, the Royal Bank of Scotland, which owns NatWest and has recently bought Holland’s largest bank ABN-Amro, has announced that it lost £4bn in the last three months as a result of the world’s great credit crunch. RBS says that it must write off £5bn in loans and debt securities that it had on its books as worthless.  And it now must ask existing shareholders to stump up more money – as much as £10bn – to buy new shares in the bank so it does not go bust.

And this is happening just a few weeks after the head of the bank Sir Fred Goodwin had declared a whopping great profit for the bank and made it clear to all and sundry that the credit crunch would not affect RBS and it had no need for extra funds.

This news shows that the credit crunch is going to hit Britain in a big way. Up to now, Britain’s main high street banks had not seemed to have suffered much – they were all announcing big profits and there was little talk of large ‘writedowns’ of worthless assets. The collapse and subsequent bailout by the taxpayer of Northern Rock was an exceptional event due to the ‘bad policies’ of one set of managers.

At the same time, the government of Darling and Brown, the leaders of industry and the City of London  were arguing that the British economy was still growing well and while the financial sector was on a ‘sticky wicket’ due the housing and mortgage crisis in the US, Britain was well-placed to avoid the worst.

Well, that story now looks shot full of holes. RBS is not a small mortgage lender from the north-east like Northern Rock that got too big for its boots.  It is a major international bank with interests in Europe, Ireland and the US. But when you delve into its accounts, you find that all was not well. 

The bank is one the weakest in Europe. Relative to all its loans and debt securities that made or purchased, it had the least amount of shareholder investment. Indeed it had safe funds worth only 4% of all the loans and assets on its books – the barest minimum allowed under international banking regulations.  And, more than anyone else, it had bought more of those ‘toxic’ mortgage securities from American banks that were backed by the value of American homes.  So much of its assets and its profits were based on the now falling value of American houses.

At the same time, it had just bought another huge bank, ABN-Amro, after a bitter merger fight for huge amount of money at the top of the market before the share prices of all the banks plummeted in the credit crunch. And RBS, like all the other British banks, was now facing up to housing market slump in the UK in 2008 that the US had seen in 2007.

And boy - is that housing slump coming. After peaking last summer, UK house prices have been slowly sliding downwards.  Now the pace of decline is accelerating. Most expert analyses have come round to the view that house prices will fall a minimum of 10% from their peak last summer – it is more likely to 15%-plus before the market bottoms some time in 2009-10.  So a house worth £250,000 last summer will be lucky to be worth £200,000 before the end.

And here is the problem. Over 50% of mortgages issued by the likes of RBS and Northern Rock in the last few years have been for over 80% of the value of the property.  And that does not include all those mortgages made to people just trying to make money from renting out flats (buy-to-let, as it is called).  So if house prices drop 15%, many homeowners are going be under water in what is called ‘negative equity’, where their house is worth less than the mortgage loan they have on it. If these homeowners walk away or default on their payments, the banks are going to take substantial losses.

And it is not just British homes. Many companies that bought their offices on loans from the banks will also be under water and there will losses on commercial mortgages too.

It is often argued that a housing slump won’t have such a big impact as it has in the US because British banks did not go in for reckless lending to people who could not afford to pay it back as they did in America – the so-called sub-prime market. 

Well, the figures don’t agree. IMF and OECD researchers reckoned that the UK’s level of mortgage debt to household income and level of house prices to income were so high that UK housing is more overvalued than in any other in advanced capitalist world – British houses are facing price subsidence.

A recent survey by a credit agency found that sub-prime borrowers who had taken out mortgages on dubious income statements were ten times more likely to default and there were plenty of places all over the UK of towns where people desperate to get onto the housing ladder now faced default. Places where sub-prime mortgages were more than 10% of homes included Manchester, Cardiff and Wolverhampton. While in London, more than 25% of all homes with mortgages were buy-to-let loans, facing ‘negative equity’.

A huge tsunami of unpaid debt is about to hit British capitalism. What the RBS announcement shows is Britain’s bankers are finally recognising that the tide is coming in fast and they are battening down the hatches. 

It is unlikely that any big bank will go bust – first they will raise more money from their shareholders to finance their past bad decisions and second the Bank of England (and that means us the taxpayers) will bail them out if necessary.

The Bank of England, having put its head in the sand for months and months, is now waking up to the disaster. It has finally started to cut interest rates (although it remains worried by a rise in inflation that it cannot seem to control).  But more, it has decided, on our behalf as taxpayers, to start buying or swapping the bad loans and debt held by the likes of RBS for UK government bonds. So the banks get nice safe bonds for their rotten mortgages to put on their books and they no longer have a problem. The problem becomes one for the government. 

Brown and Darling, after much kicking and screaming, finally took over Northern Rock and had to recognise £50bn of loans to the bank that are now the liability of the state. This new Bank of England measure will put even more liabilities on the government books. But it has to be done or there would be a major banking crisis in 2008. 

Thus capitalism works its mysterious ways: the capitalists don’t want any ‘interference’ from the state and democratic accountability when they are making huge profits; but when things go pear-shaped, they demand funds from the state but with no recourse and no control.

Who will suffer from the coming UK housing slump? Well, first it will be the workers in the financial sector, the City of London. It is estimated that about 40,000 will lose their jobs for a start. 

On the whole these won’t be the fat cats on the boards of directors on the big financial institutions like Sir Fred Goodwin (they are always ‘knights of the realm’).  No, if they get the push it will be with a ‘golden handshake’ of millions and their pensions intact. The head of Northern Rock took nearly a million and a pension for presiding over a strategy that brought the bank to its knees. Yet thousands of Northern Rock employees are losing their jobs with no handshakes, pensions or prospects of future work. 

The job cuts in the City of London will be aimed at those in the back rooms. They may be earning £30-50,000 a year – not bad by most people’s standards, but not millionaires.

The government reckons UK economic growth will about 2-2.5% this year well down from 3.25% last year.  But that is now regarded as very optimistic. The IMF, basing itself on the global credit crunch and housing collapse in the UK, reckons growth will be closer 1.5% for the next two years.  It is likely to be worse than that.

But all these forecasts lead to one conclusion – everybody, not just City workers, is going to suffer. The UK is more dependent on the financial sector in its economy that any other major capitalist country (unless you count Switzerland as major).  Job losses and rising unemployment will be the order of the day.

As I write, the government has announced another fall in the jobless figures.  Of course, this is mainly a statistical trick.  The numbers who claim jobseeker’s allowance are under 800,000. Even in booming Britain, they cannot get a job because they are so undereducated or unskilled that there are not enough low-skilled jobs available for them (there are only 700,000 no skills vacancies at the last count). 

But this is not a true reflection of the real level of unemployment in Britain.  Indeed, the total number of people in work has hardly changed in the last 30 years despite an increase in population and in people of working age. There are millions who are in ‘fulltime’ education where they are hopefully getting qualifications that will get them work. Also, there have been millions of women that have come into semiskilled work over the last few decades while millions of older unskilled men have just gone.

Where have they gone? Well, the Tory myth is that they have all signed on for ‘incapacity benefit’ claiming that they are ill or disabled and cannot work. This benefit is not means tested and worth more. This myth that there are 2.6m loafers and shysters not willing to work has been accepted by New Labour and they are cracking down! 

Interestingly, the 8% of the UK’s working population on this benefit is not much higher than the 6% in the US where the rules are supposed to be tougher.  And when the government did a survey of people on incapacity benefit, they found that half a million were suffering from depression or had clinical mental illness. Only a small minority had alcoholism or drug abuse. Moreover, only about 0.5% were faking. Sure, many of these millions were capable of doing some work, but most lacked skills, half were over 50 years, or they had sick family members to look after, or needed transport to get to jobs.

The reality is that if you added to the 750,000 claiming job seekers allowance another 1.5m claiming disability allowance who could work but cannot get a job, then Britain’s unemployment rate is not 5% but probably double that already. And the hard times are still to come.

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