Jeremy Warner's Outlook: Mortgage famine threatens further to undermine fragile British housing market

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The Independent Online

Just how bad is it going to get for the UK housing market? The news flow over the last week has been one of unrelenting gloom, culminating in the data yesterday that showed the number of new loans granted for house purchases in February slumped to a 13-year low of just 73,000. A more normal level of transactions for this time of year would be getting on for double that number. Transactions this low are consistent with a quite severe housing market correction.

After years of plenty, the credit crunch is causing mortgages to become both scarcer and more expensive. According to Bank of England figures, the cost of a two-year fixed mortgage is higher today than it was six months ago, despite a 50 basis-point cut in mortgage rates over the same time-frame. And that's if you can get one at all. Growing numbers of mortgage lenders are closing their doors to new business, or raising charges to prohibitively expensive levels.

Yet though these phenomena seem deeply worrying, in some respects they are no more than a return to normality. For the past four or five years, we have been living in a fool's paradise of apparently inexhaustible supplies of cheap credit. We've got so used to these in truth quite unusual conditions that they had come to count as normality.

All the pricing power was with the borrower, with margins eroded to wafer-thin levels among lenders. Now the boot is on the other foot. The credit crunch has resulted in significantly more expensive funding costs – both of the retail and wholesale variety – for mortgage lenders.

For instance, again using Bank of England figures, the average instant access savings account paid just 2.1 per cent in January 2007. By January this year, that figure had risen to 2.52 per cent, an increase in funding costs of nearly a quarter, and will have risen even further since then.

The same is true of wholesale funding. In July last year, just before the credit crunch hit, threemonth money cost just 27 basis points more than base rate. In February, the difference was 67 points. Many lenders will be paying even more. All this is bad news for borrowers, but good news for depositors. For the first time in years, there are some great savings rates out there. Pricing power has been transferred from borrower to lender. Those with cash can charge accordingly. That's what happens when credit becomes scarcer.

At the same time there is a greater reluctance all round to lend against housing. The subprime meltdown in the US has made credit once regarded by lenders as "safe as houses" look much higher risk. The markets won't finance house purchases as enthusiastically as they did.

All that said, there is good reason for believing the situation is not quite as bad as it is painted. Those in stable employment and with a reasonable amount of equity in their homes should find little difficulty in remortgaging, albeit at a higher cost than they are enjoying on fixed-rate deals taken out one or two years back.

During the housing crash of the early 1990s, the peak-to-trough reduction in prices was an average of 20 per cent in absolute terms. In some areas it was much worse, of course, but in the round it wasn't as big as often portrayed.

Were the same order of magnitude to be repeated this time around, it would represent just two years' gain in house prices. This would be painful for those who have bought in the last two years, but is of little significance to longer-term owners.

What's more, the number of house purchases that have actually taken place in the last two years is considerably smaller than at the top of the last housing boom in the late 1980s. The first-time buyer has also been almost wholly absent from the market. As a consequence, the numbers likely to find themselves in negative equity as a result of a fall in house prices as big as the early 1990s would be far fewer.

I don't want to sound too sanguine. Scope remains for events to spiral out of control. Northern Rock alone plans to sell on some £50bn of mortgages to pay down the Government's debt. Who in these markets would want to take that lot on?

Everyone faces a steep rise in mortgage costs. On an average loan, the price of remortgaging is nearly £100 a month more now than two years ago. That's a big slice out of disposable income. Equity withdrawal is also going to become more difficult and expensive. The latest numbers already point to a steep fall-off in equity withdrawal, further undermining consumer spending.

Those on 100 per cent or higher mortgages will find the going tougher still. Lenders will be desperate to avoid repossession, but, in remortgaging, heavily extended borrowers will find themselves on considerably more expensive variable-rate deals. Meanwhile, the Chancellor's hopes for a bounce-back in the economy next year look ever more forlorn. Yet though it is going to be a difficult workout, lasting perhaps several years, central bankers have probably done enough to ensure that it won't be quite as bad as that of the early 1990s.

Tesco's wheels look secure enough

Even the best-run companies eventually fall flat on their faces. With prolonged success inevitably comes hubris and complacency, until eventually some bright young rival comes up with a whole new way of doing things and steals the crown.

Even so, I cannot share the prevailing view that Tesco, like Marks & Spencer at the tail end of the 1990s, is about to lose the plot. Undeniably, there have been some worrying signs of it. In the last two years, there has been a quite serious brain-drain from Tesco, with the logjam at the top causing a wealth of upcoming younger talent to seek fame and fortune elsewhere.

Though they are denied by the company, there are plainly problems of supply and format with the new US operation, Fresh & Easy, leading to wider concerns about the company's aggressive overseas expansion.

Sir Terry Leahy's focus on international may be causing him to take his eye off the ball back home, where for the first time since anyone can remember there was last month a slight erosion in Tesco's previously ever-onwards-and-upwards market share. However, none of these things yet amounts to a serious setback, and certainly the latter is quite easily addressed by upping the marketing spend and reducing prices.

Tesco is so much in the public eye, with enemies on all sides willing it to slip on a banana skin, that even the tiniest of negatives is noticed, leapt upon and made something of. In a way, this is a good thing for management, for it keeps them on their toes.

Yet Tesco doesn't look or feel like a company where the wheels are about to come off. We've known for some time continued UK expansion is becoming ever tougher, with growing regulatory constraints and more effective competition, especially from a resurgent Morrisons and Sainsbury's. That's why Tesco has been busy developing internationally. The strategy is far from complete.

Outstaying his welcome has long been a risk for Sir Terry. With the passage of years, the danger of being overwhelmed by some carelessness or calamity becomes ever greater. A number of years ago, he toyed with getting out while the going was still good. But the challenge of international expansion held too strong an appeal. There is no evidence yet to suggest a change of command would bring anything to the party.

Now Souter cashes in before tax change

The unseemly spectacle of directors dashing to offload their shares to avoid the Government's new, high rate of capital gains tax continues apace with Brian Souter, chief executive of Stagecoach, adding himself to the list. Most of them strongly disagree with the new tax policy, so are only prac-tising what they preach. The same is not true of Lord Sainsbury, who, as a former member of the Government, apparently supports higher taxes on the one hand while practising avoidance on the other.

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