Jeremy Warner's Outlook: Kingfisher's antidote to slowing house market

Auditors' liability
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The end of the housing boom has been wrongly called with such frequency over the past couple of years - not least by the Bank of England - that only a fool would take the current rash of negative data on the housing market as unambiguous evidence of a turning point. My own half-hearted attempts to play the housing market suggest nothing of the sort.

The end of the housing boom has been wrongly called with such frequency over the past couple of years - not least by the Bank of England - that only a fool would take the current rash of negative data on the housing market as unambiguous evidence of a turning point. My own half-hearted attempts to play the housing market suggest nothing of the sort.

To the contrary, anything remotely desirable seems still to attract a veritable army of bidders, among which money seems to be no object. Like Paula Radcliffe, I seem constantly fated to retire hurt, even though the price I've bid has, to my mind, looked completely bonkers. On subsequent inquiry, I find that a new record has been set for the street, though not by me.

This may only go to show that, like the stock market, there are some areas and some properties that will continue to inflate regardless of the general trend. Still, whatever my own experience, the evidence of a generalised slowdown is mounting. The Bank of England has reported a sharp fall in loan approvals for July. The Nationwide building society house price index shows a month-on-month increase of only 0.1 per cent for August. And yesterday, the rival Halifax index recorded a 0.6 per cent fall for the same month, the biggest such fall in nearly four years.

I won't fully believe the market has turned until there are at least another couple of months of such figures to prove it. Activity always falls markedly over the summer months. Things may pick up as people return from their hols determined to "have that dream house". Yet there are some important features which mark the present slowdown out from previous blips in the ever onwards and upwards housing market.

One is that interest rates have been rising for nearly a year now, albeit not very far and from an extraordinarily low base. The other is the buyers' strike among first-time buyers. In recent months, they seem to have been joined by buy-to-let purchasers, who have been frightened off by the prospect of higher interest rates. If there is no one buying at the bottom of the housing ladder, that will eventually produce a ripple effect right the way to the top.

There are still some fabulously cheap fixed-rate mortgage deals around, despite the rise in short-term rates, yet everyone knows that house prices are far too high in relation to earnings and that eventually they will have to correct to bring them back into line with the historic trend. The other thing that everybody knows is that disposable income is going to be squeezed by tax rises after the next election.

As I remarked a week ago, the big imponderable is what a stagnating or falling housing market might do to the wider economy. Rising house prices, fed by cheap and easy credit, have been a powerful contributor to economic growth this past few years, helping to support consumption through record levels of equity withdrawal and by making people feel wealthier. It follows that the reverse would apply in a falling housing market.

In the early 1990s, the housing crash greatly exaggerated the effects of the business downturn, creating a demand shock which tipped the entire economy into recession. Yet there was an element of chicken and egg about it all. The housing market slumped because the economy and inflation were out of control after an unsustainable boom, prompting steep rises in interest rates which in turn caused a big increase in unemployment.

The situation today is substantially different, or at least the same extremes don't apply. Interest rates are on the increase, but they are unlikely to rise much above a relatively benign 5 per cent. Unemployment is still subdued, and there is simply a lot more wealth around today than there was then. Furthermore, the link between consumption and the fortunes of the housing market may not be as strong as it seems. I learned this while on a recent visit to Kingfisher, which is now a pure DIY company trading in this country under the B&Q brand. A retailer more linked to the state of the housing market would be hard to find, or so you might think.

In fact, B&Q's success has much more to do with price deflation, which has driven very considerable gains in volume sales, than it does the soaraway housing market. Of course, strongly rising sales at B&Q are very much a part of the British obsession with their houses, but they have only been made possible by the revolution that has taken place in the supply chain. A litre of paint costs less than half as much today as it did 10 years ago, even in nominal terms. Paint may be an extreme example, but some degree of price deflation is a reality across the product range. This improvement in the so-called terms of trade means that people can buy more for less and still be wealthier, creating a virtuous circle of ever-increasing sales. It is hard to know how big a role this relatively new factor has played in Britain's consumer boom, but it may be as much an influence as the expanding housing and credit markets. Rising interest and tax rates are never going to be a happy combination for retailers. Any squeeze on disposable incomes creates big challenges. But nor should it prove a complete disaster.

Auditors' liability

Hopes are high in the accountancy profession that the Government is about finally to concede the principle of proportionate liability and change the law accordingly. At the Department of Trade and Industry, a statement is promised "very soon", possibly as early as next Tuesday. This is the day on which the "little" Companies Bill comes back to the Commons for its second reading. If the Government is minded to reform all or part of the law on joint and several liability, this would seem to present the ideal opportunity.

Don't hold your breath is my advice. Government and profession have been batting these issues back and forth for years, and up until now ministers have strongly resisted the accountants' demands. Last year, the DTI published a consultation document on possible reform of the law on joint and several liability, but this very much put the onus on auditors to demonstrate that a change from the status quo would be of public benefit. The subtext was one of scepticism. Large institutional shareholders have meanwhile actively lobbied against any change, this mainly on the grounds that joint and several liability helps keep auditors on their toes by providing a powerful deterrent against negligence. Limit their liability, and the quality of the audit might deteriorate. Enron, WorldCom, Parmalat and other corporate scandals have given the audit profession a bad name, yet the concept of audited accounts remains a cornerstone of the capitalist system without which fraud and confusion would run amok. It is therefore important to get any changes right.

The case for change is that joint and several liability has made it virtually impossible to get professional indemnity insurance. Even in cases where the main cause of loss lies with the directors, creditors will come after the auditors because they are the people with the deeper pockets. Few will insure auditors against an open-ended liability to losses primarily caused by someone else. This in turn makes it harder to recruit audit partners. Without change, the growing trend among auditors to exit high-risk companies will further accelerate. Some big partnerships might decide to pull out of audit services altogether.

Objections to proportionality, under which auditors would be held liable only for their share of the blame for a loss, led to the alternative proposal that auditors' liability be capped at a level agreed by companies' shareholders. But this too has encountered fierce opposition, not least from the Office of Fair Trading, which refused to agree the measure would increase competition for audits and describes the present system as a "discipline on audit quality". Unless ministers have experienced a blinding flash on the road to Damascus, we can expect only further vacillation when finally they come to make their statement.

jeremy.warner@independent.co.uk

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