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British Ounce [Pound], US$, Toppled by Tumbling Home pricesGary Dorsch Economic events in the United States often provide a preview of what's around the corner for the British economy. Both countries run large external trade deficits, and much like the US, the British economy has been expanding on little else than the availability of easy credit and asset price inflation in the housing market. The ties between the US and UK run even deeper. About half of the profits for FTSE companies come from overseas, and 15% from US-based affiliates. Imaginative lending practices fueled a doubling of British home prices over the past six-years, the key engine of growth for the world's fifth largest economy. But British borrowers now face a perilous situation where their home values are tumbling, and the local banking oligarchs are lifting their lending rates, in order to recoup big losses of up to 20 billion pounds in toxic sub-prime mortgages. Little of the Bank of England's (BoE) three rate cuts since December have been passed on to debt strapped consumers, now locked in a genuine credit crunch. "Credit conditions have tightened and the availability of credit appears to be worsening. The disruption in financial markets could lead to a slowdown in the economy that is sufficiently sharp to pull inflation below target," explained the BoE in order to justify its quarter-point rate cut to 5.00 percent. In December 2003, then Chancellor of the Exchequer Gordon Brown instructed the BoE to keep a lid on the consumer inflation at 2% or less, by adjusting interest rates upward, whenever inflation rose above target. Brown told the BoE to target the harmonized index of consumer prices (HICP), adopted by the Euro zone, measuring the retail prices of goods and services, but excluding volatile housing costs.  Yet the BoE lowered its base rate to 5% this week, even though inflation is above the 2% target and BoE chief Mervyn King has predicted rising food prices and energy prices could lift the inflation rate higher to 3 percent. Britain's major gas and electricity suppliers raised their prices by 15%, and the cost of a basket of groceries is up 12%, increasing the average family food bill by 750 pounds per year. "Because we've got low inflation, we can cut interest rates," British PM Gordon Brown told the BBC. Under heavy political pressure, the BoE has abandoned "Inflation Targeting," and instead, is pursuing a radical policy of "Asset Targeting," or adjusting interest rates in order to influence the direction of home prices and the stock market. The BoE has been a champion of "Asset Targeting" for quite some time. In 2001, the BoE slashed interest rates alongside the Greenspan Fed, with both central banks attempting to inflate home prices and arrest the slide in equity markets. The BoE began to reverse its rate cuts a year earlier than the Fed, when British home price inflation was sizzling at a 26% annualized clip in late 2002. Hiking rates in slow motion over the next four years, the BoE finally broke the back of real estate inflation, when it lifted its base lending rate to 5.75% on July 5, 2007, adding heavy pressure on households shouldering 1.3 trillion pounds of debt.  The Bernanke Fed has also adopted "Asset Targeting," and is slashing the fed funds rate at a frantic pace in reaction to the sliding S&P Case Shiller Home price Index, which is 11.7% lower from a year ago. The Fed is desperately trying to put a floor under US home prices, by pegging interest rates far below the inflation rate, rapidly expanding the MZM money supply (+17% yoy), and swapping hundreds of billions of US Treasuries with bankers, in exchange for toxic AAA sub-prime mortgages. However, BoE chief King has rejected requests from British bankers to swap for toxic mortgage-backed securities. "I want to assure you that the Bank will provide the liquidity assistance that the system needs in order to restore confidence. Such lending can be only a temporary measure, but it can be a useful bridge to a longer-term solution. The BoE is not proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk." British bankers are now in a mini-panic, after the International Monetary Fund said on April 5th that home prices in the UK and Ireland are vulnerable to a sharp 30% correction. "Home prices that look particularly vulnerable to a further correction are in Ireland, the United Kingdom, the Netherlands, and France. In these economies, it is difficult to account for the magnitude of the run-up in house prices." In the UK, the average home price is around £178,000, and if the IMF is correct, a 30% slide would knock home values lower to around £124,000, leaving many homeowners vulnerable to negative equity. In the US, somewhere between 10 and 15 million homeowners might find their homes are worth less than the amount of their loans, with home prices roughly 11% lower from a year ago. British home prices tumbled by 2.5% in March, their biggest monthly decline since the early 1990's. The annual pace of house price inflation fell to 1.1%, the slowest annual growth rate for 12-years, and could go negative as the credit crunch bites into the real economy. There were just 49,000 loans made to UK home buyers in February, the lowest level in 16-years, and 33% less than February 2007. Thus, the BoE is still facing enormous pressure from Prime Minister Gordon Brown to continue cutting rates as slumping home prices threatens to topple the UK's asset based economy, rattled by the shocks emanating from the credit squeeze. To read the rest of this article, please click on the hyperlink below: http://sirchartsalot.com/article.php?id=82 Gary Dorsch 321gold Ltd |
