Spanish banks could be €50bn short of new capital requirements, says Moody’s, revising its previous estimate of €17bn based on old requirements. This is roughly 5 per cent of Spanish GDP and considerably higher than the Spanish government’s estimate of €20bn.
Overall savings banks’ exposure to the real estate sector is €217bn, by Bank of Spain data. Of that, €100bn, or nearly half, is considered “problematic”. €28bn are under surveillance and considered risky; a further €28bn are more than 90 days past due; and €44bn are foreclosed. Problematic indeed. The most troubling sentence from the Moody’s report is that just 40 per cent of the €217bn loan exposure is collateralised by finished, completed housing:
Shock news in the Bundesbank’s latest monthly bulletin: German house prices have gone up. The more-or-less flat profile of residential property prices over the past decade has been one of the defining features of Europe’s largest economy over the past year. It meant the country escaped a house price bubble, the downside of which is now being seen in the US, UK and, within the eurozone, in Spain and Portugal. (Instead German investors piled into US subprime mortgages – but that’s another story.)
“Monetary policy is still expansionary”, says the central bank, but will be a little less expansionary from February 1 when the base rate rises from 2 to 2.25 per cent. It will be the first rate rise in four months and it is likely more will follow*. The tightening move follows the introduction of a 10 per cent reserve requirement on foreign derivatives, effective January 27.
House prices have risen 17.3 per cent in the past year in Israel, a trend that accelerated last month. “The volume of new housing loans increased steeply in December,” adds the Bank. “The outstanding balance of housing loans at the end of 2010 was 14.7 percent higher than that at the end of 2009.”
It is likely the fear of a housing bubble has prompted the timing of Israel’s rate hike.
With the political fate of the $858bn deal to extend Bush-era tax rates beginning to clear – the Senate is expected to advance the legislation in a first procedural vote on Monday - the winners and losers of the proposed legislation are also becoming more apparent.
Victorious in the battle are clearly the wealthiest Americans, who will benefit from current tax treatment of income, as well as capital gains, dividends, and their inheritance, through 2012. There are also some strong provisions designed to boost business investment, which have been cheered by corporate America. And there is some reason for comfort to middle and lower income Americans, who will benefit the extension of a series of individual tax credits that were part of last year’s $787bn stimulus bill. Depending on whether you talk to Republicans or Democrats – each of these provisions could be critical to strengthening the US economic recovery.
But not everyone is happy with the outcome.
Feel the pain and move on in the UK housing market. Specifically, set up a UK Tarp to buy troubled mortgage-backed assets from banks. That’s advice to the Bank of England from Fathom Consulting’s monetary policy forum, quoted by Stephanie Flanders.
Fathom argues that the US and UK are falling into the Japanese trap – only drip-feeding cheap debt to households rather than businesses. In so doing, they argue, households feel richer and spend more, and lenders safeguard the value of the assets they are lending against. But the problem doesn’t go away. Far from it. The problem is just postponed, and at the current rate of house price decline, will amount to a £180bn funding gap by 2012 when the BoE’s Special Liquidity Scheme is due to end.
The report is only available to members, but I recommend a read of Stephanie’s take:
As the BoJ and ECB report easing credit standards, the Bank of Ireland has just proposed a new consumer code that includes stricter tests for mortgages and consumer credit. New provisions for housing loans include a 2 per cent stress test on the bank’s standard rate and stricter rules on what will and won’t count as proof of income. Self-certified declarations of income, for instance, would be out.
Another significant suggestion in the mortgage market applies to brokers. Mortgage intermediaries are not currently covered by rules that bind insurance brokers, for instance, to disclose the commission they receive on certain products. The new code would extend this requirement to them.
One of the key debates within the Federal Reserve and US economic policy circles in recent months has been whether the high unemployment rate is mainly due to structural or cyclical factors.
In the end, the prevailing view is that although there are some mismatches in skills and geography in the US labour market, the main problem is a broad-based lack of demand, which will hopefully be aided by even lower borrowing costs – hence next week’s likely move towards a second round of quantitative easing.
But a survey out today by Challenger Gray & Christmas, may, on the margins, challenge that certainty. A quarterly poll by the Chicago-based employment group found that the “relocation rate” of American workers – or the percentage of job seekers who found a new position and moved to a different region as a result – hit a record low of 6.9 per cent in the third quarter (the survey started in the 1980s).
To be sure, US labour market mobility – traditionally one of the strengths of America’s economic structure – has been on the decline. The annual average relocation rate in 1990 was 30.5 per cent, sliding to 22.9 per cent in 2000 and 13.3 per cent in 2009. But it has taken a plunge this year, with the average for 2010 now at 7.3 per cent.
Ben Bernanke, chairman of the US Federal Reserve, said on Monday that regulators were “intensively” probing banks’ foreclosure practices and expected to produce results next month. Some of the largest US banks have halted moves to claim back homes from borrowers after it emerged that they had cut corners in preparing paperwork; state attorneys general are investigating allegations of fraud.
The Fed chairman told a conference on the future of housing finance that regulators were “looking intensively at the firms’ policies, procedures, and internal controls … and seeking to determine whether systematic weaknesses are leading to improper foreclosures”.
The impact of foreclosure documentation problems on the housing market is “still uncertain” and may cast a cloud over the sector for “the foreseeable future”, said William Dudley, president of the Federal Reserve Bank of New York.
Mr Dudley, a member of the Fed’s policy-setting Federal Open Market Committee, is a supporter of further monetary easing, saying recently “further action is likely to be warranted” by the central bank. This was interpreted as a sign that purchases of US Treasuries by the Fed – quantitative easing – would step up in November.
The Great Recession of 2007-2009 hit hardest in two areas: sun-belt states such as Arizona and Florida that were exposed by the housing boom and bust, as well as rust-belt states like Michigan and Ohio that were already suffering from the erosion of America’s manufacturing base. Interestingly enough, Texas and the Midwest, which bore the brunt of the 1980-1982 recession, managed to escape most of the pain this time around.
The worst-off communities in this cycle were the focus of a conference this morning organised by the Brookings Institution’s Hamilton Project, which conducts research on economic policy and counts Robert Rubin, former treasury secretary, and Roger Altman, former deputy treasury secretary, as senior advisers.