Are you Mr N Rock?

Is this you?

Mr N Rock owns property. He has borrowed money from banks in order to fund his property purchase. As the value of his property portfolio has grown, he has used this uplift in value to fund more property purchasing (and hence taken on more debt). Sounds good, doesn't it?

Here's the problem. He's committed to buying more property - his day job doesn't earn enough to fund his lifestyle, so he has to use some of the value he extracts from each property to cover his costs, and he only becomes richer if he keeps extracting as much residual value from each property and then reinvesting it in more. The ever increasing pile of interest is serviced (barely) from the people living in the properties, so that's ok...isn't it?

Not any more. He's just discovered three problems.

1. His friendly bank doesn't want to lend him any more money, nor will they increase their exposure against his existing properties. No new properties, no way of supporting his lifestyle;
2. The value of his properties isn't going up any longer; in effect, when you take into account inflation, his capital worth is diminishing;
3. One or two of his tenants are having problems making their rental payments. It seems their costs have gone up - energy, fuel, other borrowings...now he has a problem making the interest repayments.

In our view, this is why the UK government has been so keen to support Northern Rock. It's just a bigger version of a large number of the UK population, and if it fails, so might we.... none of us can afford that.