What Next?What Next?Phase Two of the Great DeleveragingPhase Two of the Great Deleveraging
Ian ShepherdsonHigh Frequency Economics
We’re doomedWe’re doomed
We’re still doomedWe’re still doomed
The Threat Of Systemic Meltdown Has FadedThe Threat Of Systemic Meltdown Has FadedOne Big Problem Fixed, Mostly…
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50
100
150
200
250
Jan 06 Jan 07 Jan 08 Jan 09
Spread, 3-month interbank rate less baserates, basis points
……Though The US Mortgage Crisis Is Still WorseningThough The US Mortgage Crisis Is Still WorseningThe Boom Is Over But The Legacy Remains
1.52.02.53.03.54.04.55.05.56.06.5
98 99 00 01 02 03 04 05 06 07 08 096
11
16
21
26U.S. Prime mortgage delinquencies, % (Left)Sub-prime delinquencies, % (Right)
The Pace Of Contraction Has Slowed…The Pace Of Contraction Has Slowed…
xxx
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
01 02 03 04 05 06 07 08 09-6-5-4-3-2-10123
GDP, q/q% (Left)GDP, y/y% (Right)
But The Debt Legacy RemainsBut The Debt Legacy RemainsThe Debt Burden Remains Massive
60
80
100
120
140
160
180
87 89 91 93 95 97 99 01 03 05 07 09
U.K. Personal liabilities as % disposable incomeU.S.
The Only Way To Repay Is To Save More…The Only Way To Repay Is To Save More…Still Digging, But Not As Quickly
-5-4-3-2-101234567
88 90 92 94 96 98 00 02 04 06 08
Personal sector net saving, % GDP,four-quarter moving average
……That’s Hard When Unemployment Is RisingThat’s Hard When Unemployment Is Rising
As Unemployment Rockets, Arrears Will Soar
4
5
6
7
8
9
10
11
12
13
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Unemployment rate (Labour Force Survey) %
?
……And Wage Increases Are SlowingAnd Wage Increases Are Slowing
As Unemployment Rockets, Arrears Will Soar
2
3
4
5
6
97 98 99 00 01 02 03 04 05 06 07 08 09
Average earnings ex-bonuses, y/y%
Mortgage Arrears Will Rise Much FurtherMortgage Arrears Will Rise Much Further
Mortgage Arrears Starting To Rise
0
1
2
3
4
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Mortgages in arrears as % loan balances
……Repossessions TooRepossessions Too
Repossessions Climbing Too
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5000
10000
15000
20000
25000
30000
35000
40000
45000
83 85 87 89 91 93 95 97 99 01 03 05 07 09
Number of repossessions,four-quarter average(Left)
House Prices Are Still Too HighHouse Prices Are Still Too High
It Happened Here As Much As Anywhere
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
84 86 88 90 92 94 96 98 00 02 04 06 08
House price:earnings ratio, Halifax data
Lower Rates Have Had Only A Modest ImpactLower Rates Have Had Only A Modest Impact
Mortgage Lending Is In Freefall
2030405060708090
100110120130140
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Number of approvals for new mortgages forhouse purchase, thousands
Housing Equity Is Disappearing As Prices FallHousing Equity Is Disappearing As Prices Fall
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75
100
125
150
175
200
225
87 89 91 93 95 97 99 01 03 05 07 09 11
Households’ net housing wealth, % GDP 2008 and 2009 are estimated
……Equity Withdrawal Funded Much Of The BoomEquity Withdrawal Funded Much Of The Boom
…Equity Withdrawal Funded Much Of The Consumer Boom
55
56
57
58
59
60
61
62
63
64
87 89 91 93 95 97 99 01 03 05 07 09
Consumption as % GDP
Homebuyers Aren’t Alone In Feeling The SqueezeHomebuyers Aren’t Alone In Feeling The Squeeze
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-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09
Bank lending to constructioncompanies, 12-month total, £m
……Broke Banks Can’t LendBroke Banks Can’t Lend
xx
0
2000
4000
6000
8000
10000
12000
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Bank write-offs and loanrevaluations, £m, 4-quarter total
So Private Housing Construction Has Collapsed…So Private Housing Construction Has Collapsed…
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-80
-60
-40
-20
0
20
40
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Private sector housing starts, England, y/y%
Social Housing Construction Will FollowSocial Housing Construction Will Follow
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200300400500600700800900
100011001200
82 84 86 88 90 92 94 96 98 00 02 04 06 08
New construction orders, public housing£m 2005 prices
SummarySummary• Unemployment has much further to rise, despite stabilizing GDP
• Payment problems for homeowners and tenants will rise and stay elevated for years
• Leverage will prevent return to boom for a decade
• Demand for social rented property will rise; can supply rise to meet it?
• Boom and bust will never be abolished
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