Pressure mounts for housing market bail-out

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The Independent Online

The Government is coming under increasing pressure to bring relief to a housing market starved of funding and in a state of near collapse.

Yesterday the British Bankers' Association said that the number of mortgages approved for house purchases dropped by more than two thirds in the year to June; at 21,118 it is at its lowest level for at least a decade.

Some analysts are even suggesting the extinction of new mortgages by the end of the year. Malcolm Barr, UK economist at JP Morgan, commented: "If the rate of decline is sustained, this time series will approach zero in a handful of months' time."

The flow of net mortgages into the market stood at £4bn, down from £5.2bn in May. David Dooks, the BBA's director of statistics, said that "the whole market is likely to be at its least active since the early 1990s".

A report, commissioned by the Treasury by Sir James Crosby, a former chief executive of HBOS, to look at ways to ease the credit crunch, is eagerly awaited. One of a number of options is rumoured to be an extension to the Bank of England Special Liquidity Scheme (SLS), which would effectively result in the state financing a sizeable proportion of the UK mortgage market, leaving the taxpayer facing a theoretically huge exposure to loss.

Mortgage-backed securities funded around a third of UK mortgages before the market dried up. The current scheme permits banks to raise money by swapping bundles of mortgages for government bonds, at a penalty rate. Running to around £50bn, the scheme is widely thought to have been a success, but was explicitly intended only to deal with the backlog of such securities issued up to the end of last year.

The Bank has made it clear that the SLS was not intended to "rescue" the housing market and that a return to the lending conditions seen at the end of the boom was undesirable in any case, and its stance has not changed since then.

However, the scale of the problems facing homeowners and the impact on the wider economy may force a change of policy in the Treasury and at the Bank.

The Crosby working group's interim report is expected to be presented to ministers soon.

Recent figures suggest that the number of housing transactions is running at about half the level seen last year, with prices down about 8 per cent from their recent peak. This is having a dire impact on housebuilders and estate agents.

The Bank of England's Agents' Survey reports: "There were a number of reports of estate agencies refusing to accept new instructions, particularly if the seller was unwilling to negotiate on price, and some had raised their fees to reflect the increased cost of finding buyers."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The continuing lack of availability of mortgage finance is proving a major drag on the level of property transactions and is increasingly being felt in the real economy."

Meanwhile, a three-way split on the Bank's Monetary Policy Committee was revealed in the minutes of its last meeting, on 9 and 10 July. The 1-7-1 vote to keep rates on hold saw Tim Besley opt for a rate rise of a quarter percentage point while David Blanchflower wanted a quarterpercentage point cut.

Mr Besley believed a hike was necessary to "ensure the committee's credibility". The committee warned that the short-term outlook for inflation, currently 3.8 per cent, was likely to worsen. Many took the minutes to indicate that the next move in rates was likely to be upward.

The effects on the economy of commodity price inflation were apparent in the CBI's latest survey of industrial trends.

The CBI reported that, while order levels for home markets and exports had held up "reasonably well", the balance of firms saying that costs were rising rapidly was showing its worst reading since October 1980. The consequent prospects of a squeeze on profits has pushed business confidence to a seven-year low.