Jeremy Warner's Outlook: Bank's housing conundrum looks unsolvable

Teddy bears' picnic; Banking mania
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The Independent Online

In Australia, at least, the housing bubble has finally burst, with prices in the property hotspots of Sydney and Melbourne falling more than 10 per cent in the first quarter according to some estimates. There is, on the other hand, little sign of it happening here. To the contrary, the latest Halifax Price Index shows a continued acceleration. Prices jumped 2.2 per cent in May, raising the year-on-year rate of increase from 19.1 per cent in April to 20.4 per cent. Interestingly, the survey shows the South-east ­ a relatively depressed areas of the market over the past year and a bit ­ beginning to pick up again.

In Australia, at least, the housing bubble has finally burst, with prices in the property hotspots of Sydney and Melbourne falling more than 10 per cent in the first quarter according to some estimates. There is, on the other hand, little sign of it happening here. To the contrary, the latest Halifax Price Index shows a continued acceleration. Prices jumped 2.2 per cent in May, raising the year-on-year rate of increase from 19.1 per cent in April to 20.4 per cent. Interestingly, the survey shows the South-east ­ a relatively depressed areas of the market over the past year and a bit ­ beginning to pick up again.

The Bank of England's Monetary Policy Committee must be close to despair. The Bank of England has been predicting a gentle fall-off in house price inflation for nearly two years now, yet despite three interest rate rises since November the market has stubbornly refused to respond to therapy. With the economy apparently firing on all cylinders, the Bank is now widely expected to raise the repo rate by another quarter point tomorrow, yet few have any confidence this will do much to cool the soaraway housing market.

Even with rates at 5.5 per cent ­ the absolute peak of any credible forecast of where rates might rise to in the present cycle ­ it is not at all clear the housing market would be unduly affected. Yet to go any higher would most definitely affect the real economy and, if businesses and employment were hit, it would risk bringing about the very housing market crash the MPC wishes to avoid.

Frustrated at its own impotence, the Bank has largely given up trying to predict the future course of house prices, or indeed influence them. Instead, the Bank hides behind the mantra that it is no part of a central bank's remit to control asset prices. On the other hand, it's becoming ever harder to ignore them, particularly in Britain where very high levels of house ownership make house prices a vital influence on the economy as a whole. For many first-time buyers, prices have risen beyond their reach. This is bound eventually to have a big impact on general inflationary expectations. There is already evidence of it influencing wage demands. To many, it doesn't seem important that the cost of goods might be deflating when the cost of buying a property is continuing to inflate by 20 per cent a year,

The higher prices climb, the more vulnerable they become to a crash, the effect of which might be to poleaxe consumption and other forms of demand. So however much the Bank might like to ignore house prices, it won't be allowed to.

House prices in Britain would need to fall by about a quarter to bring their relationship to average earnings and rents back to their long-run trend. Perhaps unfortunately, the present bubble isn't only a function of speculative demand, fired by cheap and easy credit. It also reflects severe supply constraints, particularly in areas of the country where people most want to live. There's nothing the Bank can do about supply.

Another influence on rising house prices which is often ignored is that people can afford to spend so much more of their income on housing than they used to, if only because other areas of once heavy expenditure ­ in particular food and drink ­ now take up such a small share of the purse. This in itself may have prompted a permanent shift in the ratio of house prices to average earnings, regardless of the level of interest rates.

Even so, house prices are plainly too expensive. The Bank will just have to hope that Britain will follow Australia's lead, where house price inflation has abated without the usual backdrop of strongly rising interest rates and unemployment. Yet the MPC has been hoping that for an awfully long time now to no avail.

Teddy bears' picnic

Philip Green's campaign of intimidation against Stuart Rose, the new Marks & Spencer chief executive, continues apace. Picking up a message on his mobile phone the other day, Mr Rose was astonished to hear Mr Green's unmistakable baritone singing Teddy Bears' Picnic down the line at him. "If you go down to the woods today, you're sure of a big surprise; If you go down to the woods today you better go in disguise." For some reason Mr Rose didn't get the impression the retail financier was singing him a bedtime lullaby.

As we now know, Mr Green attempted to sign up Mr Rose for his assault on M&S, and so regards Mr Rose's decision to go over to the other side as an act of betrayal, the more so as he once thought of Mr Rose as a family friend. Yet the fact of the matter is that Mr Rose never agreed to sign up with Mr Green. Mr Rose found himself being courted by several possible private equity bidders for M&S all at the same time, but ultimately refused to be a part of any of them. Instead, he launched a high-profile campaign among M&S shareholders to secure either the chairmanship or chief executive's role. His lobbying was public knowledge well before Mr Green announced his bid.

For arch conspiracy theorists, of which there are many in the City, Mr Rose is none the less no more than Mr Green's stooge, a kind of Trojan horse, who, having put up the pretence of a fight, will eventually cave in to Mr Green and let him have the object of his desires.

So how does this theory explain the lapel-grabbing incident, in which Mr Green dragged Mr Rose from his car to give him a public dressing down on the pavement outside M&S's Baker Street headquarters, or indeed the rising torrent of abuse Mr Green has been hurling at Mr Rose? All part of an elaborate game, apparently ­ an attempt to create the impression that Mr Green is letting his ego get the better of him, and will therefore end up paying more than the company is worth. The reality, according to the conspiracy theory, is that even at something more than £4 a share, Mr Green would still be getting a steal. With Mr Rose already in the enemy camp, Mr Green can be certain of surrender somewhere close to that level.

Too Machiavellian to believe? Either that or Mr Green is an even better actor than he is money maker. But then nobody's entirely sure what's going on any longer. Does Mr Green really intend to walk away if his bid is referred to the Competition Commission? Er, well, he might have said that but that's not what he meant at all. In fact, he's keeping all his options open. "Picnic time for teddy bears, they love to play around they're having a lovely time..."

Banking mania

At a banking conference in London this week, Maarten van den Bergh, chairman of Lloyds TSB, apparently suggested in all seriousness that Britain's top five banks be allowed to consolidate into just two. "Wouldn't it be wonderful?" he asked of Ruth Kelly, the Financial Secretary to the Treasury.

Ms Kelly's response was suitably anodyne, but I think we know what she must have been thinking. No, it wouldn't be wonderful at all. It would be utterly disastrous. Britain's five major high street banks are already among the most profitable in the world, with rates of return on capital which lead to serious questions as to whether the UK banking market is a fully competitive one.

To have even fewer players would serve no one other than empire-building CEOs and their investors, and even that is debatable. Mr Van den Bergh's point seemed to be that Britain needs "national champions" in business and banking if it is to continue to hold its head high on the global stage.In order to give British businesses the scale they need to punch with the big boys, they need to be allowed to consolidate.

All business people aspire to monopoly, so I shouldn't be too hard on Mr Van den Bergh for suggesting what comes naturally. Yet the truth is that British business, consumers, employment and the wider economy all do best out of free and open markets where the highest levels of competition are allowed to flourish. The French government has deliberately pursued a policy of national champions, and little good has it done too.

jeremy.warner@independent.co.uk

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