That sinking feeling

Nov 15 2007 by Peter Jackson for The Journal

LAST week I explained why, with a back-of-a-fag-packet calculation, £500bn was not an unreasonable figure for the exposure of world banks to sub-prime mortgage debt.

This week, reports suggest that Wall Street banks alone could be looking at losses of up to £250bn which will lead to a halving in the US growth rate over the next six months.

In the US, the sub-prime crisis has led to a property price crash, with a catastrophic 30% decline in average house prices in Cleveland, Ohio. Average house prices are declining across the whole of the US for the first time since the Great Depression of the 1930s.

Some observers predict that average house prices in the US could finish next year 10% to 20% lower than last year’s peak.

This matters to us for three reasons. First, European banks have also taken on sub-prime debt from the US banks. Second, even those that haven’t, such as Northern Rock, are suffering the effects of the associated credit crunch. Third, the UK’s economic growth, like that of the US, is built on consumer spending underpinned by rising house prices.

But UK house prices are now falling; inquiries from potential buyers have fallen for the 11th month in a row and surveyors are more pessimistic about prices than at any time since April 2003.

None of this, of course, will deter the British shopper, who, according to Deloitte, is going to spend 7% more this Christmas than last.

No, it won’t be until the New Year that the bad news really hits like a hangover.

It may even be delayed until April Fool’s Day, when capital gains tax changes will make it a good time for those with unrewarding buy-to-let investments to sell up and add to the downward pressure.

This project will try to identify risks identify risks.

Peter Jackson is the former business editor of The Journal and now a director of Sunderland media agency Press Ahead.