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British Property Bubble: Default wave about to hit UK real estate

Posted December 26, 2007

"The UK housing market is going downhill fast. And as we’ve been predicting, we’ve just seen the first commercial property fund ban retail investors from withdrawing their money." — John Stepek

by John Stepek, MoneyWeek 

Baltimore — (TFN): It’s easy to get bamboozled by the scale of the numbers and the ridiculous acronyms that fly about when people start talking about the ‘credit crisis’.

But at the base of the problem, for all the talk of CDOs and SIVs and subprime and crunchy credit and all the other little phrases we’ve all become familiar with this year, is a very simple fact that anyone can understand.

Somewhere along the line, someone loaned money to someone else who couldn’t pay it back. That’s it. That’s all there is to it.

It’s been made worse because everyone along the line was making money from writing the loan business, while at the same time, everyone was convinced that they wouldn’t have to take responsibility for the loan if it went bad, because the risk apparently kept getting passed up the line.

So in this particular credit bubble, the quality of the loans has deteriorated further than ever – to the point where a large chunk of US subprime loans made in 2006 went into default before the borrowers in question made a single payment. And worse still, institutions have then been borrowing money to place huge bets on the quality – or otherwise – of these loans.

It’s important to understand this. Because all of the interest-free credit in the world, pumped into the banking system by the Fed or anyone else, can’t change the fact that at the start of this disaster, an unprecedented number of bad loans were written. And until they wend their way through the system, which could take years, banks and all the rest will be unhappy with the idea of taking on any more risk.

Why we could be heading for more write-downs…

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Posted by John Stepek · Filed Under Real Estate 

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