Hamish McRae: Don't despair over house prices
By next summer it's quite plausible that inflation will be coming down, and interest rates should be falling
Wednesday, 30 July 2008
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So what's to be done about the mortgage famine? The number of new mortgages approved last month was just 30 per cent of the level of a year ago, and lower than during the trough of the early 1990s. The report yesterday by Sir James Crosby, the former chief executive of Halifax Bank of Scotland, explained why.
The banks cannot make more loans because they don't have the money to do so. Since 2000, some two-thirds of new British mortgages were parcelled up and sold on to other lenders, often abroad. Since the global banking crisis of last summer that market has been closed: no one wants to buy British mortgages. Meanwhile, the wholesale money markets, where banks lend to each other in large amounts, have been functioning pretty badly.
As a result, the lenders have had to rely on the funds they can get in over the counter, which are more limited. That is why they are offering all sorts of high-interest deals for savers. How long before the supply of mortgages recovers? Probably about three years.
The report goes into much more detail but if it is long on analysis it is short on solutions. Sir James does not like an explicit government guarantee for home loans, or a scheme such as they have in the US with institutions that have an implicit guarantee. He looks at the idea of extending to new mortgages the present special liquidity scheme that the Bank of England has been running to enable banks to swap old mortgages for government securities.
He makes some more technical suggestions about how the secondary market in mortgages might be improved, but that is about it. This is an interim report and come the autumn there may be more specific suggestions, but with an insouciance that you have to admire, Sir James warns he may make no suggestions for government action at all.
There is a further issue noted in the report. The problem is not just a lack of supply of mortgages: there is also a lack of demand. If house prices are going to fall by somewhere between 10 per cent and 30 per cent over the next three years, first-time buyers would be advised to hang about for a year or so. There is also a fall in the supply of homes on the market. Since people have been trained to expect house prices to rise, they are resistant to the idea of cutting the asking price. Result? Paralysis, or at least something pretty much like it.
Politically, this is pretty toxic. There is obvious pressure on the Government to do something, but its options are limited. The housing market is too big relative to public finances, which in any case are in poor shape, for it to be able to make a material difference to house prices. The value of British housing stock is falling by about a billion pounds a day. The government borrowing requirement this financial year will be about £50bn. It cannot reasonably increase that by more than a few billion, so the idea of it lending enough directly to stabilise the market is absurd.
The idea that the Bank of England might extend the special liquidity scheme to new loans makes more sense, provided it was only top quality loans that qualified. The Bank does not like the idea, I think largely because it does not want to rescue the banks from their previous errors.
You could argue too that lenders are doing no one any favours by making loans on assets that are likely to fall in value. But all central banks have a duty to protect the solidity of the banking system, however stupid the banks have been, and you could make a good case that helping maintain a flow of new mortgages is part of that duty.
Other ideas have been mooted, such as having local authorities and housing associations buying unsold properties, but there are powerful objections to that. One is that the amount of funds available would do little to stabilise the market; another that these organisations have a fiduciary obligation not to waste public money, and to buy homes on a falling market would be to abuse that.
But if it is not possible to do much to tackle the root causes of the problem, and the numbers are too big for that, there does seem to me to be a strong case for mitigating its impact on the economy as a whole. Whatever this government and its successor do, the supply of home loans will be difficult for the next three years or so. Sir James is right about that. That will inevitably lead to a sombre housing market, which may run into 2011 or 2012.
By then – and this is much more hopeful – money incomes will have risen by 15 per cent or so, and with some further falls in nominal house prices, the ratio of house prices to average earnings will be back to a reasonable level. Once that happens, house prices can start to advance again, though hopefully not in the way they have shot ahead during the bubble years.
So, the trick will be to make sure that what will continue to be a difficult housing market does not sabotage the real economy of the country. Here, again, I think it is possible to be reasonably optimistic. At the moment, the economy is still growing, albeit slowly. Living standards are being squeezed partly by the increases in taxation planned by Gordon Brown but also by the surge in global energy and commodity prices.
There is nothing that can be done about the former, but the latter will get better. It is possible that we have already passed the peak in oil prices, and by next summer it is quite plausible that inflation will be coming down towards the 2 per cent central point that the Bank is supposed to target. Then interest rates should be falling fast.
We will need that, because next year will be difficult for the economy. There are some forecasts of recession around, and that may occur, but whatever happens it will be a period of very slow growth. But, and this is important, I have not seen anyone suggest that this downturn will be as serious as that of the early 1990s. The housing market may be as tough as it was then, but the economic downturn won't be. So there.
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14 Comments
An economy so reliant on the steady, and sometimes frantic, rise in asset prices, expecially property, is seriously unbalanced. It's the old "boom and bust" economy in a modern format.
The banks got greedy and leant to people who weren't creditworthy. That's why we have the credit crunch. better regulation of the lenders, and a saner attitude to lending criteria is the way to achieve a more balanced economy.
Posted by David | 30.07.08, 12:48 GMT
I love the post about how strongly the economy grew under 10 years of the Tories. True, but for their years in power prior to that they had savaged the economy to such an extent it could hardly help but grow! 10 years of sensible stable growth, in a sensible, stable economy - or as close to such a thing as any government can reasonably influence - is a far more useful achievement. Rampant growth is one of the curses that causes the very problems we are facing now - massive growth in housing demand and prices, massive growth and demand for fuel and oil, etc, etc. Has the poster forgotten the housing boom and bust of the 80s/90s? Imagine what state we would be in now with Nigel Lawson having been chancellor for the last 10 years. I shudder to think.
Posted by Eric | 30.07.08, 12:47 GMT
The report also says that funds remain available for people with reliable incomes wanting to borrow up to 75% of a property's value. Why would you encourage people to borrow, banks to lend or the taxpayer to underwrite more than 75% in a falling market? And why in a slowing economy would you want to encourage or underwrite loans to people without the means to service them? For years the CDO market flooded and distorted the property market with woefully underpriced money. That aberration is over. Why try to replace it? Now is time for values to fall to what buyers can afford to spend from their own resources and/or expect to be able to finance over the full lives of loans that carry fair premiums for the risk of default without the safety net of an ever rising market.
Posted by Simon | 30.07.08, 12:30 GMT
Why not just leave the housing market to find its own level?
In recent years people have been buying houses they can't afford and banks have been happy to lend them the money.
With prices falling and banks enforcing stricter controls on lending then then maybe soon people will buy houses they can afford and banks will lend only as much as people can pay back - just the way it should be.
Posted by S Smith | 30.07.08, 12:13 GMT
I think both people and banks have realised that inflation is going to be here for a while longer (as it is now embedded in the developing countries who supply us), salaries are only going to lag behind inflation (so no real purchasing power growth) and interest rates are going to have to be held at neutral levels (~4-5%). So all things equal only one variable is left to change: house prices themselves -they'll have to come right down to 2000 levels for the ratio of house prices to average earnings to become normal again.
Using any more taxpayers money or BoE guarantees to help banks fund new mortgages right now would not only be morally dubious, it would skew the market, as the building societies and banks who have been more sensible lending money and have more cash reserves would lose their competitive advantage.
Posted by Monocle | 30.07.08, 12:01 GMT
"But, and this is important, I have not seen anyone suggest that this downturn will be as serious as that of the early 1990s"
Could this be because of the enormous amount of system justification, or status quo bias, that is being exhibited by the media, politicians and by the public generally? It strikes me that the more mediocre a society becomes, the more people within it seek to attribute its failures to the shortcomings of other individuals. And the less prepared they are to accept that the principal causes of social failure are the obstacles that mainstream attitudes put in the way of good quality decision-making.
Can anyone tell me of an effective way forward that doesn't require the breaking of this chain of thought?
Posted by Simon S | 30.07.08, 11:00 GMT
I love how home-owning writers of the chattering classes endlessly write articles trying to re-inflate the housing market. I wonder why? Maybe because these tools have been living on equity to fund their debauched London lifestyles (to a man and woman they are usually ugly, out of shape and slovenly). Utter freaks when you see them in other countries and compare with normal, healthy people. These abominations of humanity should be pushed out of the media and I would like to see some people who set a good example.
Posted by Frank Fortune | 30.07.08, 10:23 GMT
Since the housing market is dead anyway, now is in fact the time to make sure we don't get another bubble.
The legislation needed is not to try to artificially prop up unaffordable housing, but to bring accountability for imprudent trading and lending.
This would start with financial penalties for directors who got their companies in trouble by short term policies of over-lending and then scarper with massive payments, including the ex-boss of the FSA who failed in his duty and then left with a massive pay-out.
The banking system should be supported if necessary with a bail-out, but shares in banks in trouble should loose all value via nationalisation and ex-directors whose imprudent trading lead to the difficulties should be the one who end up broke and homeless.
Posted by David Martin | 30.07.08, 10:12 GMT
What "real economy" is Tom MacFarlane referring to when he says it was destroyed in the 1980s?
In fact, in this period the economy grew strongly. Even areas such as manufacturing output grew steadily, if unspectacularly. Contrast the last 10 years of the Tory government where manufacturing output grew by 20% with the ten years of the Labour government where it has grown by 2% (and has actually shrunk since the first couple of years of New Labour).
You can check the figures on the ONS web site.
Posted by HJ | 30.07.08, 09:44 GMT
To me this is symptomatic of the self-deceiving and unspoken pact that politicians and the electorate have struck over the last decade. Both sides have to face the fact that good times to the extent that the housing market has enjoyed must be followed by, if not bad times, then certainly less good times.
Let prices fall naturally. Give the banks a few years to sort themselves out. A few years - maybe even a decade - of a quiet housing market is what we need.
Houses shouldn't be investments!
Posted by Jamie | 30.07.08, 09:44 GMT
14 Comments