There is something bizarre about Lady Thatcher's behaviour, since good form would surely dictate a dignified mea culpa if she really believes that present economic policy is leading to a catastrophic 'financial accident'. Was not the Prime Minister at the time Britain announced on 5 October 1990 that it was joining the exchange rate mechanism none other than her Ladyship of Kesteven?
Lady Thatcher's ruminations nevertheless fall on fertile ground. The Conservative troops are far from happy. John Major is still not able to hold out firm evidence of a recovery. His statement to the Munich summiteers that British growth would be 'up to 1 per cent' this year was disingenuous. If the Treasury's internal June forecast does not show a minus number for this year, albeit probably a mere fraction, I will eat a boatload of Panama hats.
The point is arithmetically simple: national output dropped throughout last year, so that the level of output in the first quarter of this year was fully 0.8 per cent below the average level for last year. It needs to rise strongly this year just to show the same average level, which would mean zero year-on-year growth. Even sprightly growth of 0.5 per cent in the second, third and fourth quarters would leave output down this year compared with last.
So where is the recovery coming from? Industry itself is bound to help by slowing down its destocking. As it sells less from the storeroom, it must inevitably meet more of the demand for its goods from the factory floor. Output will rise. But this can only be a short-term boost, and will have to be sustained by rising final demand.
Since consumer spending is nearly two-thirds of domestic demand, it is the consumer who remains the key, and it is the sick housing market that is the obvious place to start in any campaign to cheer the consumers' spirits.
The housing market affects consumer spending in two ways. First, falling prices eat into the equity which people hold in their homes, making them more cautious about spending money, and keener on saving it. This is particularly true for those people who bought homes at the top of the Eighties boom, and whose debt now outstrips the value of their house. According to John Wriglesworth of UBS Phillips and Drew, some 1.5 million householders may be caught in this 'debt trap'. The 'feel bad' factor in the housing market is one reason why the savings ratio reached 11.5 per cent in the first quarter, the highest since the early Eighties.
The second influence is more direct. In such a dispirited housing market, there are very few transactions: indeed, the official figures show that the number of property transactions was actually down by 25.2 per cent over the year to May, after a decline of 10.5 per cent over the same period a year before. So far this year, transactions are running at an annualised rate some 18 per cent below the lowest level of transactions in any year in the Eighties.
Fewer people buying and selling means fewer people moving house, which means fewer purchases of furniture, consumer durables, decorations and so forth. Nearly a fifth of spending is related to housing, and there is no time when people are quite as extravagant as when they move house. Even big ticket items seem small compared with the sums needed to buy a home.
Why have transactions tumbled so badly? One reason is the 'debt trap' itself: if the value of people's homes is less than their mortgage, they cannot trade up to a larger home unless they are prepared to borrow much more than they did originally. But the main reason lies in the peculiar nature of the housing market, which is a market in assets like shares or bonds. As a result, it rarely obeys the simple rules of supply and demand which operate in more humble markets for potatoes or fish.
Economics textbooks tell us that when prices fall, more buyers come forward until they match the number of sellers. Transactions trundle happly along. However, asset markets often behave in precisely the opposite manner: if people think prices will continue to fall, they will actually be more reluctant to buy because it makes sense to buy more cheaply tomorrow than to buy today.
This psychology is particularly true today in the housing market: most lenders now insist on a deposit of at least 5 per cent of the value of the house. At the same time, the Halifax figures show that first-time buyers in the South-east suffered a loss in the value of their houses of 6.7 per cent over the year to the second quarter. In other words, most first- time buyers a year ago lost their life's savings. Why buy only to lose money even if houses are more affordable than for many years?
When the housing market finally shows real signs of turning, the half- a-million-plus backlog of first-time buyers who have been holding out could re-enter with a bang. As in other asset markets, rising prices will actually encourage more purchasers. That in turn will enable owners who would like to move - who are not caught in the 'debt trap' - to sell their homes and trade upwards. The market will begin to move.
If that turning point has not been reached by the autumn, when the next mini-selling season normally gets under way, the Government will have to think up new ways of helping the market if it is not to risk enduring recession. The macro-economic costs of allowing the housing market to slide out of control are simply too great to ignore. In ascending order of radicalism, here are some options:
Extend the stamp duty holiday beyond August. This has had little effect, and might have even less if a further postponement of duty encouraged the view that it was unlikely to be reimposed.
Extend housing benefit to low-income households, rather than merely to people who become entirely unemployed. At present, low-income tenants receive help but owner-occupiers whose income falls sharply (but does not disappear) do not. The snag is that this measure would cost about pounds 800m in a full year, although arguably the Treasury would recoup much of the cost if spending and VAT picked up.
Give a special tax credit to first- time buyers for a defined period of maybe five years, funded by a phasing-out of overall mortgage interest relief. The case for a phase-out is greater now that inflation is falling, and is eroding the pounds 30,000 limit more slowly.
Although intervention goes against the Government's grain, it is a corollary of assigning interest rates to target sterling's value. Since interest rates cannot be used to regulate domestic demand, there is a strong case for developing other measures to do so. The housing market is too important to ignore.
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