Outlook: Lapthorne takes the plunge; let's hope the pool's not empty

Equity withdrawal; Safeway/Morrison

Some good news at last from the beleaguered telecoms goliath, Cable & Wireless. Richard Lapthorne is an inspired choice as chairman, and the company has secured his services in double quick time as well. It is little more than six weeks since the chairman-elect David Nash was forced out because of a crisis of confidence in his leadership.

Mr Lapthorne is the man credited with helping to turn around British Aerospace after the disaster of Sir Roland Smith's rule, when the company nearly went bust. Perhaps as clever, he managed to get out before the latest crisis to engulf Europe's largest defence contractor, thus demonstrating a penchant for good timing, which is always admired in the City. In any case, he knows all about basket cases, and if anyone can sort out the mess that C&W has become, Mr Lapthorne can.

The real surprise is that he could be tempted away from semi-retirement in Provence to take up such a chalice. The money must help. Mr Lapthorne is being forced to put at risk quite a chunk of his own money to get his free shares, but it won't require much of a recovery in the share price for him to make a real killing. Even so, Mr Lapthorne is not like Sir Christopher Bland at BT, who would knock over his own grandmother in his enthusiasm for a challenge. Mr Lapthorne is a quieter, more withdrawn character.

His experience of telecoms is zero, unless you count Orange, where he remains a non-executive director. But that may be a positive boon for a company that needs straight thinking much more than New Economy vision. His first task will be to revisit the turnaround strategy designed by the present chief executive, Graham Wallace, and make up his mind whether it makes sense or not. The City is sceptical about a strategy that requires the thick end of £1bn to be spent just to return a loss-making business to profit. Unfortunately, no one has a clue what the alternatives might be.

Even if Mr Lapthorne buys the Wallace strategy, Mr Wallace won't survive. He's lost all credibility in the City, and he won't be trusted as the man to implement the restructuring.

Equity withdrawal

For those who see big dangers in Britain's soaraway housing market, there was further cause for concern yesterday in new figures from the Bank of England, which show that equity withdrawal is continuing to roar away at an almost unprecedented rate. Or perhaps the correct word should be "was", since these are figures for the third quarter of last year. If the housing market is now cooling, it is reasonable to assume that equity withdrawal will be abating too.

Even so, in the third quarter, equity withdrawal rose to near record levels. At 6.6 per cent of post-tax income during that period, equity withdrawal has only once before been proportionately higher, which was towards the peak of the last housing boom in 1988. Throughout most of the 1990s, equity withdrawal – borrowing to consume against the value of your house – was either marginal or negative, but since the start of 1999, it has been climbing steadily, helping to keep consumer spending high despite the business slowdown.

Quite a lot of equity withdrawal is for the purpose of funding home improvements, which of course should add to the value of the property. But it is still spending, and the effect has been to keep the economy growing at a time when many businesses are contracting. The worry is that if house prices are about to stop growing, so too will equity withdrawal, dealing a pronounced demand shock to the UK economy.

Most mortgage lenders argue that there won't be a house price crash. Cheap mortgages, a shortage of supply, and an ever growing number of households will keep prices at least stable, they argue. I don't agree. I can't tell you when prices as a whole will start falling, but they already are at the top end of the London housing market, and I imagine this is a harbinger of a more generalised fall at some stage this year. Once the psychology of lower prices sets in, shortage of supply, or indeed a surplus of cheap mortgage finance, matter not a fig. In Japan, which has similar supply and demographic characteristics to Britain, and where interest rates are near zero, domestic property prices have been falling for more than 10 years now.

I rather doubt that's the outlook for Britain, but prices have risen too high and there is a growing resistance to paying them. Once they start falling, it is quite hard to stop the process, even when fair value is reached once more. This is roughly what happened to the stock market. Again, mortgage lenders say housing is not like the stock market if only because it is not as liquid, and people have to live somewhere.

The reality is that when push comes to shove, the market will behave in exactly the same manner. We are either at or very close to the peak. Once people collectively decide they are no longer prepared to take on the level of debt necessary to pay today's exorbitant asking prices, there will be a correction. That in turn will halt equity withdrawal in its tracks and the wider economy will suffer.

Interest rates were left on hold this week, but with no sign of a pick-up in external demand to counter the likely slowdown in consumption, I'd be amazed if they stay there for very long. January and February tend to be quiet months in any case, so the Monetary Policy Committee will want to see them out before deciding on a cut. But it's coming, and when it does it might even provide the housing market with a pick-me-up. Unfortunately, not even the redoubtable Sir Edward George, Governor of the Bank of England, can hold back the tide for ever.

Safeway/Morrison

Sir Ken Morrison can win the battle for Safeway, but he's going to have to hold his nerve, and he will also have to change – which he won't find easy. It seems to me more or less inevitable that Asda and/or Sainsbury will counter the Wm Morrison bid with a much higher cash offer of their own. A portfolio of stores on the scale offered by Safeways becomes available perhaps only once in a generation, and both rivals will move Heaven and Earth to obtain them. For Sainsbury, there is also the defensive purpose of preventing the emergence of a powerful fourth force in the groceries trade.

So one or other will bid. To get round the obvious competition obstacles to any such offer, they'll promise to parcel off some of the stores to the other, or perhaps even Wm Morrison if it is still interested. What's more, I think the City highly likely to take the regulatory risk of such a bid on the chin, provided the price is right, and rather than take Sir Ken's all shares bid, wait for the outcome of the Competition Commission investigation on the alternative. Investors will figure that if the Commission says no, then Sir Ken's inferior offer will still be there to fall back on.

The only possibility for upset I can see in this scenario is that Sir Ken, in a show of Yorkshire stubbornness, throws his toys out of the pram, says he's pulling the offer, and retreats to Bradford. Safeway shareholders might then end up with nothing at all. That's why he needs to hold his nerve. It is highly unlikely the competition authorities will allow a carve up of Safeway assets given the alternative of Sir Ken's fourth force, which should have the effect of further enhancing competition in an already cut-throat market. He'll have to wait longer for his prize than he banked on, but in the end he will get there.

He's also going to have to swallow some pride and start dancing to the City's tune. There's a high degree of scepticism about his ability to achieve a successful integration. Sir Ken has some hard sell ahead of him. That means road shows, talking to investors and, horror of horrors, spending more time in London. The City won't be convinced by his track record alone, impressive though it is.

jeremy.warner@independent.co.uk