After six months of falling prices, a rising tide of repossessions and the prospect of millions of families slipping into negative equity, the Governor of the Bank of England, Mervyn King, said yesterday that there was little the authorities could do to prevent a housing crash, if that is what the market demanded.
During a press conference to launch the bank's Inflation Report, Mr King said: "It's hard to judge where prices may go... We are in a period where prices are adjusting to new levels. Buyers and sellers are struggling to find out what that new level is. The market will determine it, not us or the Government. Once we have reached that level then prices should normalise. But that does not mean back to levels seen early last year that were clearly excessive."
His remarks stand in stark contrast to ministers who say they are searching for ways to "rescue" the housing market, most notably through measures such as a "holiday" for stamp duty and an extension of the Bank of England's special liquidity scheme.
Reports yesterday suggested that the Chancellor, Alistair Darling, is considering ordering the Bank to extend the scheme, making it easier for the high-street banks to lend. While the Bank is committed to what might be called a "son of SLS", officials have always made it publicly clear that the SLS was never intended to "kick-start" the mortgage market.
Yesterday, Mr King reiterated that stance, voicing considerable opposition to any move that would in effect result in the state funding the mortgage market. "Funding is not something the central bank can supply ... It would be a very dangerous move to move to a situation where the Government saw its major role as guaranteeing lending," Mr King said.
"Why should the taxpayer take on the risk of borrowing by individual borrowers, some of whom are risky? It's the lenders who should take on the risk. Pretending there's a magic solution is not the answer."
Mr King stressed that it was no longer liquidity in the banking system that was the major issue in mortgage funding and other lending, but the capital adequacy and lending policies of individual institutions.
He said: "The Bank can't provide funding to finance investment. That has to come from mobilising savings in the economy at home or abroad to fund investment: that's what the financial sector is there to do." Mr King's scepticism echoes that in the recent interim review of the mortgage market by the banker Sir James Crosby for the Treasury.
Sir James, a former HBOS chairman, wrote to Mr Darling: "I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve."
The Bank also painted a gloomy picture for the construction industry as a result of the correction in the housing market and the general slowdown in the economy, predicting that, if housing starts remain at their present depressed level, that could reduce economic growth by between a quarter and a half percentage point.
But the Governor also highlighted the way the credit crunch has left some people relatively unscathed in terms of the cost of borrowing.
"It's the riskier borrowers who are finding it more expensive," he said. "That's where the credit crunch is hitting. It hasn't had an enormous impact on those people who are much safer borrowers. That's what you would expect.
"We are moving from the imprudent period of excessive lending back to a period now of much more cautious lending."Reuse content