As post-election expectations of a revival have crumbled, those at the eye of the storm, the house-builders, building societies and banks, have become increasingly jumpy about the prospects for the residential market.
Calls have mounted for something to be done to get the market moving. They do not yet appear to have convinced Whitehall. With the housing-led consumer boom still fresh in its memory, the Government is far from keen to give the market further incentives that it might later regret. Talk of letting the 'house price adjustment run its natural course' is frequently on ministerial lips.
Dramatic action to kick-start the market, such as doubling mortgage interest relief, would probably only be attempted in limited circumstances: if the difficulties in the housing market were perceived to be undermining (or threatening to) the stability of the financial system, if they seriously threatened to stymie a nascent recovery or if the housing market was chosen as a specific tool to get the economy moving.
The Government is sufficiently worried, though, as the Independent on Sunday reported last week, to have commissioned a 'what if' report from the accountants Touche Ross, who have been asked to work out how enmeshed the economy and housing market are and to map the consequences of a further slump.
It is an unenviable task. The evidence is confusing and, even among those directly affected by the decline in the housing market, there is disagreement about the best course of action.
Those most immediately affected are the construction and house-building companies. By the top of the housing cycle in 1988, construction companies were deriving more than 60 per cent of their profits - twice as much as in 1980 - from house-building.
They were accordingly very vulnerable to the downturn when it came in 1989. Robert Donald, a construction analyst with the brokers County NatWest, calculates the industry as a whole could theoretically be losing pounds 500m on house- building. That figure looks even worse if write- downs on overpriced land bought during the boom years are included. So far the quoted sector has written down the land in its books by around 15 per cent, or pounds 700m, to about pounds 3.7bn. But plot prices soared more than 140 per cent between 1985 and 1988, and few believe further write-offs can be avoided.
The industry's troubles have already led to a shake-out in employment that seems destined to continue. The Building Employers Confederation estimates about 200,000 jobs have gone so far, with another 50,000 to go this year, reducing the workforce below 1.5 million. Another 50,000 jobs (out of 250,000) have been lost in the building materials sector, which relies on house-building for about 15 per cent of turnover.
There is probably more to come. Construction industry output fell by nearly 9 per cent in 1991. County NatWest believes that if there is no improvement output will fall 10.5 per cent this year and 7.5 per cent in 1993.
Fewer workers earning fewer salaries means less consumer spending and less overall activity. It also means higher public expenditure on benefits and lower tax revenues.
But a much scarier prospect for the Government is the possibility that there might be widespread collapses in the construction industry, and that these would pose a threat to the integrity of the banking system.
Certainly the health of the banking sector is sensitive to the industry's problems. Of outstanding loans to property and construction groups of around pounds 40bn, construction lending accounts for about pounds 15.7bn. Of that, UK retail banks have lent pounds 10bn - with Barclays alone accounting for pounds 3.1bn.
Yet most of the pounds 2bn or so set aside so far by UK clearers against the property and construction sector is thought to relate to commercial developers, such as Mountleigh or Speyhawk, rather than the construction giants.
Arguably commercial property developers (who would be affected only in very indirect ways by a housing market revival) remain the banks' biggest problem - the UK clearers have loans outstanding for property development of about pounds 17bn. Moreover, house-builders - unlike the developers of office blocks - can always choose not to replace land as they sell their properties. This can improve cash flow dramatically in the short term.
'Housing is important but not critical,' Mark Stockdale, a construction analyst with SG Warburg, said. 'It's a contributory factor to the problems of the industry, but not as important as the commercial construction market.'
Commercial work remains the bedrock for construction groups, he said. House-building last year represented around 15 per cent of construction output. Even in the peak year of 1988 it only reached 29 per cent. The fall in commercial construction work, which came in 1990, has been more dramatic than the decline in house-building, which started in 1988. Commercial work is down nearly pounds 4bn in output terms since its pounds 7.8bn peak in 1990. Housing is down from pounds 5.3bn in 1988 to pounds 2.8bn.
'As far as the quoted construction sector is concerned, the ones that are in trouble are probably so bad that they can't get any worse, while the ones that aren't are not in too bad a position,' Mr Stockdale said.
Others disagree. 'So weakened is the demand for commercial property that any improvement in building activity in 1994/95 will depend on the housing market,' Robert Donald said.
But even among those with a vested interest in the house-building sector, there is ambiguity about whether priming the market is advisable. 'Research indicates that up to 40 per cent of demand for things like kitchens, boilers and bathrooms is generated by people who moved house in the last 12 months,' said John Carter, chief executive of Hepworth, which specialises in boilers and drainage systems.
As the number of house moves has been slashed by half, so has his business. 'If you take all our house products markets together - things like garage doors for instance - demand is probably down by 20 to 50 per cent from its peak.' Yet he is wary of a direct stimulus to the housing market. 'Of course I'd like a short-term boost, but what I really want is a long-term one. I would like stimuli that grew the economy and safeguarded any tendency to inflation. Otherwise all the pain will have been for nothing.'
Mortgage providers, the banks and, especially, the building societies, also have a direct stake in the health of the housing market. In theory a collapse in the market could cause them big problems. But it is hard to find anyone who views a systemic collapse as likely, even on the most apocalyptic of assumptions.
John Wriglesworth, UBS Phillips & Drew's housing specialist, said building societies were built on very firm financial foundations.
'A 20 per cent fall in house prices might see some of the smaller ones in trouble. But the big societies, who are 95 per cent of the industry, could probably still take care of that.'
With the average loan pounds 32,000 and the average house price pounds 65,000, the scope for further declines before stability is threatened is considerable. Despite big tumbles in the South of England, UK house prices have dropped by only about 5 per cent.
Adrian Coles of the Building Societies Association also points to the strength of the movement. The relationship between societies' capital and liabilities has improved from 5.5 per cent in 1990 to 5.7 per cent last year, he says.
'That means that building societies could lose up to 5 per cent of their assets and still be OK. That's a very solid base.'
Building societies are still making profits - about pounds 1.33bn last year, only a slight decline from pounds 1.56bn in 1990. While the number of branches has been reduced, the number of staff employed by building societies has risen over the past three years.
The building society movement's defence of its calls for a stimulus to the housing market is based not on its own position, or on systemic threat, but on a more general argument about the housing market being in a deteriorating state and deserving an economic re-boot.
'We have come to a situation where the housing market is in very deep recession and the normal response would be to cut interest rates,' David Gilchrist, general manager of the Halifax, Britain's biggest building society, said. 'As the Government can't do that, we think it is not unreasonable to see what you can do on the housing market side.'
The UK banks are also sanguine about their situation. Bryan Crossley, Hoare Govett's banking analyst, pointed out that National Westminster's repossessions are 0.4 per cent of total accounts, 'which is half the industry average'.
Property of all types is the key to banking assets - it represents around 70 per cent of all the security held by the banks against loans.
'But most of that is commercial. It takes a lot of houses to make up the value of an office block. Even in a Doomsday scenario, the Government wouldn't need to bail out the housing market to save the banks,' he said.
Of course, many other financial institutions depend directly on the housing market for some of their profits. The insurance companies, in particular, have suffered heavily for piling into estate agency in the mid-Eighties, often at ridiculously inflated prices.
But much of the cost was a one-off, and estate agency losses are now largely under control - even though many say the current downturn will probably mean some more redundancies.
Mortgage indemnity insurance, where the industry failed to charge enough for standing behind some of the building societies' losses on repossessed properties, is more of a problem.
Around pounds 1.2bn has already been paid out or provided for as a result, although liability on the policies is potentially open-ended. Yet the risk is concentrated in three or four companies. Although the rest of the industry is affected by the fading mortgage-backed endowment business, that is not vital to the health of the industry, Tony Kerfoot of General Accident said. 'A further slump in the housing market probably wouldn't directly affect us. More important is probably the general confidence impact.'
This is what is so hard to measure, especially as far as retail spending is concerned.
Some retailers are directly affected - furniture and floor covering, DIY and electricals (white and brown goods), and general household goods together make up a fifth of all retail spending, currently about pounds 136bn a year.
'There seems to be no pick-up in those areas,' Nigel Whittaker, chairman of the Confederation of British Industry's distributive trades panel, said. But he did not foresee corporate failures as a result. 'In our view, those companies which remain in this part of the retail sector are reasonably robust. The disasters have already happened.'
Even a further collapse in the housing market would have little impact. 'It would be tough but not terminal.' He also believes that there could be a general recovery in the economy without a housing market revival. 'Its not a sine qua non but clearly it would be preferable if there were also a housing recovery.'
Retail sales as a whole are higher than in 1988, but sectors closely tied to the number of house moves have suffered particularly from the halving of transactions since 1988. Furniture and carpet sales, making up about 5 per cent of retail sales around pounds 7bn, have fallen 9 per cent since then. Allied Maples, the carpet retailer, calculates that every 100,000 new houses built add 2 per cent to carpet sales. And research by Dixons suggests mature markets for expensive goods such as large televisions are closely related to house moves. Sales of washing machines have fallen by a quarter since their 1988 peak, for instance.
But many believe it is the confidence factor in the housing market that matters most. Kevin Hawkins, corporate affairs director of WH Smith, which also owns the DIY retailer Do It All, said: 'The housing market is important to us, but it's more in terms of consumer psychology. The recession has been exaggerated because of this psychological effect of the downturn in the housing market.
'People have made gains if they are in work and have cut their debt, but they are not spending, because they are worried about the future. That's because they are frightened their house will end up worth less than their mortgage, and because of worries about unemployment. If the Government wants to do something to get people spending and the economy moving, the housing market is arguably its most significant weapon.'
But Helen Dunn, an analyst with the brokers Shearson Lehman, warned that many factors may be as influential on spending as the housing market. 'You have a big fear of unemployment now. Even if you tried to stimulate the housing market, there is a risk that it might have little effect.'
Add it up and the case for intervention, at least at this point in the cycle, looks a weak one. The strongest argument for stimulating the housing market appears to be the need to prompt higher consumer spending. But there is considerable doubt, not only about whether now is the right time for such a reflationary approach, but also about whether improving the lot of home-owners would be the best way to achieve that effect.
It looks as though we might all have to learn to put up with bumping along the bottom of the housing market for some time to come.
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