David Prosser: Why the Bank of England must protect us from ourselves

Outlook: The larger the loan to value of a mortgage, the greater the chances of a modest setback in the housing market plunging the borrower into negative equity
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So what should we make of the wildly conflicting house price data with which we have been presented over the past week or so? While Halifax Bank shocked on the downside with a report that house prices fell by 3.6 per cent in September alone, the suggestion by Rightmove yesterday that prices have actually risen by 3.1 per cent over the past month looks equally surprising, albeit at the other end of the scale.

Part of the explanation for the Rightmove figure is that the online estate agent records only what sellers are asking buyers to pay for their homes – not at what price transactions are eventually agreed, which is what most other surveys, including the Halifax index, track. It may well be that many sellers, concerned by the falling market, are now pitching their initial asking prices higher in the hope that they will be beaten down only to what they had hoped for originally.

Equally, the Halifax data looks like an extreme generated by a sampling error – the volumes of properties bought and sold each month have fallen to such lows that each individual survey is no longer necessarily a representative sample. The three-month house price decline recorded by the bank, which should be more statistically reliable, is much more gentle.

The underlying picture, however, is relatively clear. On a poll of polls basis, house prices have been sliding very gently downwards for several months now. The Ernst & Young Item club expects that slide to continue, predicting a 5 per cent decline before the end of 2012 when it forecasts the market will begin recovering, albeit very slowly.

To put these numbers in context, prices fell by about 20 per cent during the 18 months that followed the break-out of the financial crisis in the autumn of 2007, and recovered about half of those losses before the declines began again in the summer. So it will be several years yet before we test the highs that were seen at the end of the credit boom. Do not, however, assume that this spells disaster. Each time we see a house price fall, an awful lot of nonsense is talked about spikes in the number of people now affected by negative equity. What that term actually means is that your home is now worth less than the mortgage outstanding on it (not that it's worth less than you paid for it, as is often reported).

Even then, negative equity is an immediate concern only if you want to sell your home in the near future (especially if it is a sale forced upon you by financial difficulties). For everyone else, the problem is theoretical – it's a question of biding your time until a return to price rises removes it.

Clearly, however, the smaller the deposit you put down on a property, the greater the chance of negative equity biting. A 95 per cent mortgage plunges the buyer into the trap with only the sort of market fall that Ernst & Young is predicting. A borrower opting for a 75 per cent loan to value will suffer this fate in only the most extreme of housing market collapses.

All of which underlines just how dangerous high loan-to-value mortgages can be – and gives succour to the Bank of England, which wants the ability to impose restrictions on such products as part of the new toolbox it will get when it acquires powers to address systemic risks.

The review of health and safety legislation we have just seen notwithstanding, people often do need protecting from themselves, particularly when it comes to the peculiarly British obsession with the property market.



Will investors do what they say?

Here's some positive news from the City for once. The Financial Reporting Council will today announce that it has persuaded 68 organisations to sign up publicly to its Stewardship Code, the initiative it launched last year following criticism of institutional investors' failure to rein in the excesses of banks and others during the financial crisis.

The code is an important step forward for corporate governance in the UK – which, though it may not be fashionable to say so, is of a higher standard than almost anywhere else in the world. It requires institutional investors to publish much more information about how they vote on issues at the companies in which they are invested – and to give more detail on how they discharge the rest of their responsibilities as owners of these businesses.

The code is also designed to make it easier for such investors to act together on corporate governance matters. A group of large shareholders speaking as a common voice has much more chance of getting its way than an investor that stands alone. But collaborations in the past have been few and far between – partly because they have different interests, but also amid fears that talking to each other about sensitive financial matters might be frowned upon by regulators. There are strict rules preventing "concert parties" forming to effect changes of control of companies.

It is therefore to be welcomed that 48 large fund management businesses and 12 big pension funds (as well as a group of providers of investment services) are today giving such backing to the FRC's code. Even signing up to principles that investors have traditionally felt very nervous about represents real progress.

Still, the real test of the project is yet to come. While it is heartening to see such support for the FRC, will the code achieve what it sets out to do? Will we begin to see managements changing course following the intervention of groups of shareholders, or will companies continue to play lip service to the complaints of investors while merrily continuing to do what they see fit?

The case of Prudential is an interesting study in where this might all lead. Following the collapse earlier this year of its bid for AIA, there were calls for the heads of the insurer's chief executive and chairman. But the investors concerned were relatively isolated voices and Pru prevailed in its wish to retain its key lieutenants.

More positively, however, Pru has been stung into making significant improvements to the calibre of its non-executives since the episode, so the willingness of investors to go public with their concerns has already begun to have an effect.

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