The British house price bubble seems to be abating, to judge by surveys this week from both the Nationwide and Halifax, but is it going to be a hard, or a soft landing, and what will it mean for the wider British economy, buoyed as it has been this past three years by the soaraway housing market?
Yesterday's Halifax survey showed house price growth slowing to just 0.6 per cent last year, which annualised would reduce house price inflation to just 7.2 per cent. That still might seem high given that prices have already risen by one and a half times since the mid 1990s, yet it's a whole lot slower than the 20 per cent plus annual house price inflation of recent years.
It also disguises some big regional variations, with prices continuing to grow strongly in Scotland and the North, but already falling in London and the South-east. London tends to lead the rest of the country both on the up and the downside of the housing cycle, so we can expect what's happening in London to ripple out into the rest of the country over the months ahead. There are also some big variations within regions, and according to price bracket. In the £1m-plus bracket in some parts of London, prices have already fallen by 10 to 20 per cent.
These trends correlate quite closely to the last housing bust in the early 1990s. Peak to trough, the average fall in prices was a more modest than you might think 19 per cent, but this disguised much sharper falls in some geographic areas and in some price brackets. Are we heading the same way this time around? The missing features are very high interest rates and rising unemployment. The last recession was essentially manufactured by policy makers to reduce inflation and support Britain's position in the European Exchange Rate mechanism. Rising interest rates enormously increased mortgage servicing costs, eating into disposable incomes. House prices fell and so did consumption.
This time around, the circumstances are completely different. Low inflation has allowed the Bank of England to counter the business downturn by cutting interest rates, thus reducing mortgage costs and supporting consumption. That process cannot go on forever, but there is no reason to think it will go sharply into reverse.
Buoyed by job creation in the public sector, unemployment too remains low, almost incredibly so. Even so, people are starting to feel worse off. Higher taxes, low wage inflation, a little bit more job insecurity, a falling currency, and the ever more pressing realisation that we'll all have to save a lot more to finance our old age have combined to produce a growing "feel bad" factor.
As a multiple of earnings, house prices are at near record levels. Earnings are no longer rising by very much, so house prices either have to remain the same for a long period of time, or they have to fall to bring them back to their long run trend. Markets tend not to plateau, they correct.
Permanently lower interest rates may justify a permanently higher multiple, but whatever the ratio settles at, it is probably not as high as the present one. Those who don't have to sell won't, but eventually there will be some distress selling at lower prices and the market as a whole will start to fall, as it already is in London. It's unlikely to be a crash, but the conventional view that there will be no significant fall at all looks fanciful to me.
Thankfully, this is unlikely to mean the economy will plummet too. Bank of England figures published yesterday show equity withdrawal in the first quarter at close to an all time record as a percentage of after tax income. It may be abating a bit now, yet in the long run it ought to remain relatively high as increasing numbers of the elderly use their properties as a source of income. Remortgaging onto cheaper deals is also a process that's got a way to go yet, helping to put more money in people's pockets.
So a falling housing market shouldn't spell an overall economic contraction, particularly if it is a gentle one. Well, let's hope not anyway.
The Crown Prosecution Service is reported to be about to bring charges for corporate manslaughter against Railtrack and Balfour Beatty over the Hatfield rail crash. If successful, the CPS would then proceed to prosecution under lesser, health and safety charges of eight senior managers, including the former Railtrack chief executive, Gerald Corbett. A number of points seem worth making.
Nearly all corporate manslaughter prosecutions fail. Indeed, there have been only three successful prosecutions under existing law, all of them small beer. Most of the high profile cases of accidental death caused by corporate negligence have gone unpunished, either because the charge failed to stick, or because it was deemed too difficult to make in the first place. As a result, the Government is proposing to change the law to make such prosecutions easier.
The Hatfield prosecutions will, presumably, take place under existing law, and the chances of success therefore seem slim. To succeed with the charge of corporate manslaughter, the CPS is required to show that an individual who "is considered to embody the company" knew that lives were being put at risk through criminal negligence of health and safety rules. The courts must establish a "directing mind and will". Systemic failure, or the negligence of a junior employee, are not necessarily good enough.
In the new law, the Government proposes to remove this stipulation so that prosecutions can be brought for a generalised failure to maintain health and safety standards. It would no longer be necessary to establish the culpability of the chief executive, or some such other senior official. The change comes too late for Hatfield, which is likely to be the last big, high profile prosecution under existing law. The case none the less raises some important issues of lasting significance.
By bringing the corporate manslaughter charge, the police will by implication be attempting to hold senior directors culpable. That everyone knew there was a general cracked rails problem at Railtrack is not in dispute. Nor is it disputed that Railtrack knew of the specific problems on this stretch of line and failed to act. But whether that makes Mr Corbett and the company legally liable for the crash is an open question. There were plenty of other stretches of line where exactly the same thing might have happened, such was the lamentable state of underinvestment in the railway at the time.
In other words, there are many others who might be held accountable for Hatfield, from the architects of rail privatisation to the regulators that starved the company of the resources necessary to be safe while at the same time requiring it to meet punishing targets for punctuality and standards of service. The courts must decide whether Mr Corbett was personally negligent, but his situation was also an impossible one.
All those who hold high office have been given pause for thought. Industries where health and safety is a big concern may struggle to recruit the high calibre people they need. Should the chief executive be held legally accountable for all avoidable lapses? It's like asking whether Greg Dyke should be made to resign as director general of the BBC over the Iraq dossier row, as it now appears the "sexing up" allegation against Alastair Campbell is largely unfounded.
Mr Corbett must defend himself, but is there not an element of show trial in these proceedings? At a time when the Government appears to be making a complete horlicks of reform of the railway, refocusing public attention on Railtrack's short and undistinguished tyranny makes for a convenient distraction from present difficulties. I'm not suggesting the whole affair be swept under the carpet, but you can only blame the previous bunch of incompetents for the failure in public services for so long. As for the proposed new law on corporate killing, it will need to be exceptionally well drafted if it is not to become a charter for compensation lawyers.Reuse content