Thursday, January 03, 2008
Credit conditions tighten
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The Bank of England's quarterly credit conditions survey helps confirm why the housing market has been so weak over the past three months. It finds: "Contrary to their expectations in the Q3 survey, lenders reported that the availability of secured credit to households had been reduced materially over the three months to mid-December. They expected a further reduction in secured credit availability over the next three months."

This will be something of a surprise to the Bank, which had thought that weaker demand was the main driver of the downturn in secured lending. Unsecured lending has been less constrained, which explains its recent pick-up. Companies are facing tougher credit conditions. The details are here.


Could it be that constrained secured lending conditions are paving the way for more uplift in unsecured lending? I think the banks are balancing their books in such a way that;

a)Secured lending to households and businesses was a direct victim of the credit crunch and thereby affected,

b)It would be difficult to cut off supplies to the unsecured borrowers so as not to miss out on the income they derive from it and slowly wean off credit if conditions were to deteriorate,

c)The money advanced to this unsecured market is minimal compared to the secured market.

Given that businesses are expected to face the brunt of this tightening,GDP expectations for 2008 being what they are, we would more likely witness problems in liquidity if firms' are not liquid enough.

Posted by: Hitesh Damani at January 3, 2008 06:20 PM

"This will be something of a surprise to the Bank, which had thought that weaker demand was the main driver of the downturn in secured lending."

Which I guess means that the demand is still there. So the scope for lowering interest rates could be lessened after this report.

On another note, how about "Lending Lull" as a better phrase for "Credit Crisis" ?

Posted by: Nick Thorne at January 3, 2008 09:54 PM

I like ARMageddon personally, but I'm being overly dramatic.

As for housing demand dropping off due to a shortage of credit, well forgive me but if you stop handing out cheap money to people who frankly aren't best placed to repay it, in a frenzied environment where millions started to dream of becoming millionaire property speculators, then surprise surprise it's likely to act as a bucket of cold water and dampen demand.

But what will dampen it further in the medium turn is the realisation that the market was hugely overheated, that it has turned and the resultant switch from spending to saving that will probably lead to a rise in unemployment. It could easily become a negative feedback loop.

Markets are no more efficient or rational than the people who make them, and forgive me but in my humble experience of humanity few of us are as efficient or as rational as we would like to believe we are.

Posted by: jonathan at January 5, 2008 09:06 AM

Thanks for those cheery thoughts. Just a small thing - I don't think you've quite picked up the point about demand. The credit conditions survey suggested that demand was still quite firm, including from buy-to-let investors, but that some of that demand was being frustrated by an unwilliingness of the lenders to supply credit. Now that money market conditions have eased, it will be interesting to see whether the lenders have become a little less concerned too.

Posted by: David Smith at January 5, 2008 09:54 AM
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