Anarchy in the UK
What makes this UK credit bust so chilling is that the British have had it relatively easy.
Editor's Note: The following article was written by Minyan Stephanie Pomboy of Macro Mavens.
Remember the argument that the US housing bubble's deflation wouldn't hurt a bit...'cuz we were sure to follow the UK analogue? If not, don't feel bad. Even the folks who promulgated this view seem to have forgotten. Either that or they're still wiping the egg from their faces.
How else to explain the deafening silence surrounding news last week that personal bankruptcies in the UK had soared to an all-time record and were now up 55% from the year before? Towel, please!
What makes this UK credit bust so chilling is that the British have had it relatively easy. In contrast to US consumers, for the British, home equity withdrawal was a serendipitous supplement to wages, whereas here it has been a substitute for it. REAL wage growth in the UK has been solid whereas, here in the US, it only recently turned positive… and that due to declining energy prices. On top of which, the Brits have a fluffy savings cushion to fall back on (6% versus NEGATIVE -0.2% in the US).
All of this would seem to suggest that the exposure to home price deflation here is significantly higher than it is there. And that brings us to the real spine-tingler. This bumper crop in delinquencies in the UK has occurred even though home prices NEVER DECLINED! They simply rose at a slower pace! Sure, it was a sharp slowdown - from 27% to 1.7% - but nonetheless, incidents of 'negative equity' were widely averted.
Given the copious inventory the US has built (another blaring difference between the US and the UK housing bubbles), the potential for material declines here is high. Meanwhile the exposure to said declines is far greater for US consumers than it was for their British peers.
But hey, don't take my word for it. Realty trac reported last week that foreclosures rose 17% in the 3rd quarter and are up 43% y/y. This means one in every 363 households is now in default. No wonder the mortgage finance companies are tripping over themselves to securitize this stuff STAT!!
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