Expert Commentary

The Crunch of Credit Deflation in the U.K.

Mortgage lenders are already stepping back in Britain.

Negative equity is a splendidly duplicitous phrase. It is used to describe a situation whereby the value of the asset that has been purchased by a borrower has fallen below the amount of debt owed. It’s essentially a sanitized term for describing part of debt deflation. Negative equity was rampant in the U.K. during the recession of the early 1990s when property prices collapsed, leaving people owing more than their house value. It also arose after the Great Financial Crisis of 2008 and a similar situation could be on the way now.

With the U.K. economy imploding, a fact acknowledged by the Chancellor of the Exchequer today as he unveiled plans to try and mitigate it, asset price deflation is very probable. House prices are already declining and now evidence is emerging of mortgage lenders beginning to ration credit. Nationwide, one of Britain’s biggest residential mortgage players, has tripled the minimum deposit that first-time buyers must stump up before securing a loan. Previously, buyers had to put up 5% of the property value, but that has now been raised to 15%. Nationwide said that the move is to protect first time buyers from the prospect of negative equity when house price values fall, but it is a clear indication that attitudes are changing towards credit. Nationwide is nervous about property prices and doesn’t want to extend credit to risky borrowers. This is what happens in a credit crunch.

The chart below shows that the average house price in England has advanced in a clear five-wave structure (the fourth wave even looks like a triangle), since the late 1960s. That was when the Bretton Woods monetary system fell apart and the debt bubble of the past 50 years began. After five waves up, under the Elliott Wave Principle technical analysis we can anticipate that a decline will emerge. Given the multi-decade nature of the advance, the decline may well be deep and long-lasting.

Average House Price Index for England