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Bradford and Bingley- Another Bank Cracks Under Credit Crunch Pressure

Companies / Banking Stocks Jun 02, 2008 - 12:59 AM GMT

By: Nadeem_Walayat

Companies

Best Financial Markets Analysis ArticleThe Bradford and Bingley, Britain's biggest buy to let mortgage lender is expected to announce another profits warning later today as its Chief Executive abandoned the sinking ship ahead of a £300 million originally heavily discounted rights issue at 82p, which given Friday's close of 86p and today's expected price slump looks increasingly vulnerable.

Way back in August 2007, well before the credit crisis broke across the mainstream media, I specifically warned of three mortgage banks that are especially vulnerable during the next housing bust Of the three the first one to go was Northern Rock in spectacular style and much earlier than one could have imagined during Sept 07, by way of the first run on a British bank in 150 years. The Government eventually did another u-turn by nationalising the bank in January 08.


Bradford and Bingley appears to be trending towards a similar fate despite huge amounts of funds made available to the bank by the Bank of England in an attempt at averting the credit crisis contagion from spreading across the decimated UK banking and mortgage finance system.

The Bank of England and Treasury will be out in force attempting to arrange a potential rescue package for Bradford and Bingley by one or a group of larger banks BEFORE it reaches the stage of Northern Rock, as the last thing Gordon Browns beleaguered government needs is the nationalisation of a another big UK bank.

As I warned in November 2007, the Buy to let sector will be hit the hard in the quarter April to June 2008 as contrary to Bradford and Bingley's assertions, it will be these speculative investors that will be the most eager to bail out ahead of sharp price falls, which is now coming to pass. The outlook for Bradford and Bingley looks grim for several more years as the share price suggests having collapsed from £4.50 to just £86p (80%) with a further plunge expected on today's opening.

Those hoping for an early turn around in the UK housing market are in for a great deal of disappointment. The UK housing market forecast for a 15% fall over 2 years (Aug 07 to Aug 09) has proved remarkably accurate to date as the above graph illustrates, and given the Nationwide's latest news of a slump in May 08, there is no silver lining visible on this dark cloud hanging over the mortgage sector. In fact my most recent analysis concluded that the UK housing market is expected to fall by at least 19% in nominal terms over 3 years (Aug 07 to Aug 10), which equates to a 33% drop in real terms (RPI).

Home owning consumers accustomed to gains in house prices equivalent to their salaries which induced them to use their housing equity as ATM cards are now facing the deflationary impact of an annualised loss in equity of equivalent to as much as 50% of their salaries. Under these circumstances, the recent tax cut of £120 a year, is but mere peanuts given the scale of the impact on the economy of the housing bust that will be most forcibly felt during 2009.

As an example of how overvalued UK house prices are internationally, one only needs to compare against the US housing market.

Meanwhile the vultures are circling amongst the carcasses of decimated financial institutions such as Bradford and Bingley, we already saw JP Morgan buy up Bear Stearns for 10 bucks a share against $160 a year earlier. A large part of the collapse followed a panic and short-selling driven mark down in the week before the takeover that was accompanied by a $30 billion sweetener from the Fed. Nomura of Japan is the latest to announce the formation of a $3.3 billion credit crisis fund to buy up illiquid and thus heavily marked down securitised debt assets as a gamble on the unfreezing of the interbank market at some point in the future. Expect large chunks of Bradford and Bingley to also be sold off in the near future.

The consequences of the credit crunch has resulted in governments throwing out their monetary policy rule books. As an example the expectation is for the Bank of England to quietly forget that its primary objective is to target 2% CPI Inflation, perhaps it will be announced by Gordon Brown in another U-turn later this year? The western world continues to drift into an era of stagflation under which circumstances panicking governments will increasingly be tempted to buy votes ahead of elections, as Labour illustrated by the announcement of £2.7 billion tax cut ahead of the May elections. The result of this strategy of inflating the money supply will just prolong the pain as Japan learned following its own credit crunch in the early 1990's the consequences of which are still evident today.

For more analysis on credit crisis subscribe to our FREE weekly newsletter.

More Analysis of the UK Housing Market:

26 May 2008 - US and UK Housing Bear Market Trends
22 May 2008 - Council of Mortgage Lenders 2008 Housing Market Forecast Demolished
08 May 2008 - UK House Prices Tumbling- Interest Rate Conundrum
21 Apr 2008 - Bank of England Throws £50 billion of Tax Payers Money at the Banks
17 Apr 2008 - Credit Crisis SCOOP- LIBOR Is Now Irrelevant to Derivatives Pricing
08 Apr 2008 - UK House Prices Plunge Over the Cliff
01 Apr 2008 - How to Fix the Credit Markets
11 Mar 2008 - RICS Data Confirms UK Housing Market Heading for 1990's Style Crash
03 Mar 2008 - Credit Crisis Morphs Into Stagflation- Protect Your Wealth!
26 Feb 2008 - UK House Prices Fall for 5 Months in a Row- Housing Market Will Go Negative April 08
07 Feb 2008 - UK Interest Rates Cut to 5.25% - Will Not Help the Housing Market
21 Dec 2007 - UK Commercial Properties Crash Looms as Property Investment Fund Frozen
07 Dec 2007 - Analysis of Interbank and Base Interest Rate Spread
05 Dec 2007 - UK Home Owners Unable to Refinance Mortgages As Fixed Rates Expire During 2008
02 Dec 2007 - UK Housing Slump Gains Momentum as Properties Fail to Sell at Auction
10th Nov 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell on Capital Gains Tax Change
28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall
25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!
22nd Aug 07 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth
1st May 07 - UK Housing Market Heading for a Property Crash

 

By Nadeem Walayat

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Mark
02 Jun 08, 02:46
Australian Housing market

Very interesting article, Nadeem.

I have been following your analysis and find it to be quite accurate all the time.

Are you able to make a prediction for the Australian housing market? It seems the housing market in Australia is very resilient to any downturn. Can we expect a USA/UK style housing downturn here in Australia?

You thoughts on this would be highly appreciated.

Thanks

Mark

Sydney, Australia


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