House Prices Fall Worldwide

Intro Hello. I'm Bernard Hickey with the daily briefing from interest.co.nz... Today, we'll look a bit more closely at what the Reserve Bank is saying about house prices and the willingness of banks to lend in the midst of this credit crunch, And we'll look at the latest development in the turmoil on global credit markets. This time it's all about Fannie Mae and Freddie Mac. They don't sound like serious names, but this is a serious problem. It's worth the wait. Story 1, But firstly, we look a bit more closely at what the Reserve Bank said yesterday about house prices. A few comments were made that were buried under the headlines about steady interest rates and slowing economic growth. The Reserve Bank reckons house prices will fall by an average 5% in 2008 and probably be stable in 2009. But Reserve Bank governor Alan Bollard has warned that there is a risk that house prices call fall much more sharply. He says there has been a tightening of credit conditions among banks, who are being more cautious about how they lend to businesses and consumers. The Reserve Bank also reckons that house prices are 20-30 per cent over valued in real terms. That could either mean a sharp correction of prices in the next year or two or a long slow catch up where actual prices don't move but inflation of 2-3% a year for a decade or so whittles away that over valuation. There's even some discussion on propertytalk.com that we might not see any more capital gains for property investors for 50 years. Story 2 Now for a story about Fannie Mae and Freddie Mac. These are the mortgage providers in the United States who cater for lower income people. They were set up by FDR in the late 30s. The idea is that they provide the finance to a bank or mortgage provider for lower valued properties and then they break those mortgages up into securitized parcels and then sell them on to investors. Because they were set up under a government mandate the assumption is that they're backed by the government. They are now absolutely huge and responsible for so-called agency loans totaling 4.5 trillion. That's 37 times bigger than the value of New Zealand's economic output each year or about a third of the size of America's GDP. Up until now they've been seen as safe and they're AAA rated. But now there's some real nerves around this sector. A mortgage bond fund run by the Carlyle Group defaulted on some margin calls last night. The US Treasury also helpfully reminded people that Fannie Mae and Freddie Mac don't actually have a federal guarantee. This unnerve US stock markets. The nerves are growing because of the sheer ugliness now being uncovered in US housing markets. Almost 1 in every 100 home loans in America is now being foreclosed on. Almost 5% of every homeowner in America is behind on their payments. House prices have fallen 9% in the last year. No wonder there is a global credit crunch that is driving up interest rates as far afield as New Zealand. I'm Bernard Hickey from interest.co.nz with the Daily Briefing. Catch you on Monday.