The real estate credit blowout

The further you dig into the balance sheets of UK banks, the more disturbing it gets.

Take, for example, lending corporate lending to real estate companies. No, we are not talking about mortgages. We are talking about lending to companies "undertaking the development, buying, selling or renting of real estate".

In the decade between 1997 and 2007, the outstanding stock of bank loans to these companies increased by 479 percent. Back in 1997, UK banks had about ₤33 billion outstanding; by December 2007, it had increased to almost ₤200 billion.

It wasn't just the absolute amount of lending that was increasing, it was the proportion of total corporate lending. Back in 1997, lending to real estate companies account for ₤5 out of ₤100 of corporate lending. By 2007, that proportion had reached over ₤11.

What exactly are these companies? We are talking about about basic types; property developers; estate agents and letting agencies. Think about it for a moment; 11 percent of total corporate lending went to these jokers. What were the banks thinking?

However, there is a more disturbing number. In the first six months of this year, lending increased a further ₤39 billion to reach a staggering ₤232 billion. While the housing market was crashing, UK banks were still pouring out a massive amount of new credit on an industry that was basically imploding. This ₤39 billion represents about 2.8 percent of GDP.

I just don't understand what is going on here. Somebody help me. Have I got the numbers wrong? Did I make a mistake? Or are the banks really this stupid?

As an aside, take a guess at the total stock of loans to manufacturing. As of June 2008, it was just ₤33 billion. To give this number some perspective, the total stock of UK manufacturing loans was less than six months of new credit to estate agents and property speculators.