We continue to monitor activity in the credit markets for signs of deterioration. The credit cycle has unquestionably changed credit, particularly unsecured credit, is progressively harder to secure, especially for those who desperately need it. We think that this is the single most important issue.
Barclaycard's Chief Executive, John Varley, recently reported that 50% of applications this year have been refused. However, in typical double-speak, he downplayed talk of a credit crunch saying: 'We are being selective about who we lend to. Unsecured loans are usually the first to go into arrears if people are finding it tough, because their first point of defence is their mortgage, but it is important to retain a sense of perspective. There is no crisis and we don't see any signs of significantly higher unemployment'.
If that is not how a credit crunch starts, we want to know how it does start!
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It is not hard to explain why the credit cycle is changing it is because lenders are suffering losses, causing them to become more circumspect. Personal bankruptcies are at all-time highs, as borrowers realise that under the easier bankruptcy rules it is relatively painless to walk away from a shed-load of unsecured debt.
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And in the US, the belief is that the property market is still booming, but much that has been reported recently indicates otherwise. For example, in June the number of new unsold homes rose to a record number of 2.65million units. This inventory of new unsold homes has risen every month this year. That sounds to us like supply is exceeding demand.
Frank Nothaft, Chief Economist of Freddie Mac, in an attempt to reassure, said 'The average loan-to-value ratio after refinancing is still 70%, which means house owners are being pretty conservative'. We hate this word average' it means many loans are much higher than 70%. We do not think 70% is conservative when prices are at bubble levels.
If, as the Office of National Statistics recently reported, the average UK householder is spending £120 a week more than they earn; and if about 43% of US families spend more than they earn, then it seems quite obvious to us that a great number of people on both sides of the pond are paying their mortgages from increased borrowings.
We have seen all this before. It is inevitable that with the change in the credit cycle many of those will eventually default on their mortgages watch property prices then!
By R H Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets.
