Margareta Pagano: The last thing our housing market needs is to be propped up

Mervyn King should be congratulated for refusing to bail out lenders
Click to follow
The Independent Online

Mervyn King, Governor of the Bank of England, is right to resist calls to nationalise the UK mortgage market as his colleagues in the US – or USSA as the country is being nicknamed – have done with the bailout of Fannie Mae and Freddie Mac.

King was also right to use the Treasury Select Committee last Thursday to step up his campaign to persuade us that any government attempts to guarantee mortgages would not only cost the taxpayer dear but would prevent the banks undergoing the necessary restructuring to get out of their present mess.

As King points out, it is simply not true that there is a "structural failure in mortgage markets" which needs unlocking, as many backbenchers are claiming. If potential homeowners have between 5 and 10 per cent of the loan they wish to borrow, there is no shortage of lenders. Indeed, one of Barclays' top directors told me last week that its Woolwich mortgage arm is doing record business – so long as borrowers have the deposit. And that's the rub.

Consider this: the average house price in the UK has more than tripled in the past 12 years to £175,000 – about seven times the median annual wage. Therefore, to take out a mortgage you are likely to need a deposit of about £17,000; when the other costs involved in buying a property are added on, you're looking at about £20,000. With the average salary in the UK at £23,000, a 10 per cent deposit on that £175,000 property would be the equivalent of almost an entire year's after-tax earnings for the average worker. So it's hardly surprising that the mortgage queue is dwindling or that the savings rate is just 1 per cent. Nor are people stupid – they know that prices have further to fall.

Chris Watling of Longview Economics has some interesting comparisons with the early 1990s that will make you choke. The average house price then was £50,000 – yes, £50,000. Average salaries were £16,000 and the average price to median earnings ratio was just over three times, making it possible to save. But over the past 12 years prices have rocketed by 167 per cent – even during the 1980s boom they only ever rose 80 per cent to the peak. This phenomenal rise is also why Watling reckons they have another 25 per cent to fall.

Lower house prices will be good for all of us. Soaring prices have had the most extraordinary cultural impact. Rising equity has been a false promise, because it fuelled not only spending but more credit-card borrowing. Too many people believed that equity would repay their loans and buy their retirement too. Well, that's gone. But I wonder if it's also why workers have been reluctant to push for higher pay and the real reason why unions have been so quiet. That, as we know, may soon change too.

It was also timely for King to remind us that central banks are here to provide short-term liquidity to the system, not to make it easier for banks to lend to potentially reckless consumers. That's why the Bank's plan to launch the "interim liquidity support facility" this week to replace the special liquidity scheme, which closes at the end of October, looks smart. It will allow banks to smooth out any funding while they adjust to the market, but will not provide long-term funding to the mortgage market. The bubble needs to deflate a bit more.

Clearly the next big issue for the Governor and his colleagues on the Monetary Policy Committee will be by how much, and when, to cut interest rates. King's obsession with controlling inflation is the right one but it may well have to be sacrificed to allow some room for manoeuvre on rate cuts – something that can only be a matter of weeks away.

I'm surprised that confidence in the Bank of England is said to be so low; taxpayers should thank King for taking on the devil's advocate role. He certainly sees himself as the people's champion against the bankers he considers dangerous. Gordon Brown must rue the day he turned the Governor into his main opposition: or maybe he agrees with him?

A fertile new asset class that comes with royal approval

Prince Charles says time is running out for the rainforests but he may have timed his quest to save them rather well.

At the City's Mansion House last week, the Prince explained why rainforests are worth more alive than dead and why he wanted the financiers present to help him turn them into a new asset class.

Guyana has already offered to conserve its forests in return for access to the financial markets, while Brazil, which owns more than a third of the world's green lungs, is planning its own forest fund. Brazilian officials met with the Prince's team for further discussions on how the investments could work. The sums involved are huge: Stanley Fink of Man Group reckons that each hectare of rainforest is worth $15,000 – some 75 times more than its land value alone. That's an incentive even for the City's brightest, who have time on their hands right now to help fulfil the Prince's ambition.

Paulson must perform the operation to carve up Lehman Brothers

Don't be surprised to wake up to find that Lehman Brothers has been carved up and sold in a weekend rescue operation managed by the hyperactive Hank Paulson, the US Treasury Secretary, and his honchos from the Federal Reserve.

When the markets closed on Friday, there was no doubt in anyone's minds that a quick solution was needed to put Lehman out of its misery. As one banker kindly put it: "The market needs another body – that's Lehman. But the corpse will have to be dismembered."

Bank of America and Barclays are two of the most enthusiastic potential buyers but there are others, such as China's sovereign wealth fund, CIC, which will add interest to this weekend's talks. The enormous Bank of America could easily absorb Lehman's business and 20,000 staff. But so could Barclays, if it is allowed to and if it could persuade its big sovereign wealth investors that to do this would be a clever move.

The fascinating thing about Barclays' interest in Lehman, however, is what it tells us about the UK bank's ambitions to be a serious "bulge-bracket" player in the US markets. The ambitious Bob Diamond, Barclays' president and chief executive of Barclays Capital, is said to have flown to New York last week for talks. Diamond, himself an American, wants to expand into broader investment banking; he has built up the debt business but lacks the equities and corporate finance businesses of his peers. BarCap now trades 10 per cent of all US Treasuries and is ranked third in the world in foreign exchange trading. Barclays is also said to be interested in Lehman's wealth management business, Neuberger – certainly cheaper than buying the investment bank.

Lehman is not Bear Stearns – this is a confidence crisis, not one of liquidity. Paulson does not need to bail out Lehman in the same way but he does need to restore confidence in the financial markets. He can't let Lehman bleed over the world's front pages any longer and so will probably have to intervene.

Comments