To summarise the background, the housing market is still moribund. New mortgage loans were down last month. So were new commitments for loans to be made in the coming months. This is bad news for those pinned down in a house they would like to sell, and bad news for mortgage lenders. How much does it matter in the grand scheme of things?
The direct influence of house prices on consumer spending generally is more limited than many commentators suggest. The 1980s bonanza was a special case because of the deregulation of lending. The decade saw an unusually large proportion of mortgage loans withdrawn from housing to be splashed on consumer goodies. It was the one-off result of the end of credit rationing.
In more normal times lower mortgage rates obviously increase the cash available for spending on other things, and a lot of moves make for a lot of spending on new fridges and carpets.
Apart from that, though, winners and losers in a house price boom - or slump - balance each other out. There is little direct effect on the sum of consumer activity. The intangible effects on confidence are far more significant, however.
Housing is dear to the British heart. Since the Second World War we have invested on average 3-4 per cent of national output every year in housing - a proportion equivalent to the possible cost of reconstruction after the Kobe earthquake.
On any suburban street the love and creativity - and money - that most people lavish on their homes is plain to see, whether it takes the form of proud rows of bedding plants in the garden or Cotswold stone cladding (ugh!).
A generation of house buyers has been emotionally scarred by the collapse in house prices. None of the million or more borrowers whose homes are worth less than their mortgage will feel their personal finances are in order until they can finally break even on their property. They are unlikely to be eager borrowers ever again, and will pass on the moral to their children.
Even the lucky ones not trapped by negative equity have had to adjust to the switch from apparently secure 20 per cent annual returns on their biggest single asset to falling real returns, and the fear that their endowment policies might scarcely cover the cost of paying off the mortgage.
Moreover, the spread of home ownership and rising prices did more than any other phenomenon to make the distribution of wealth in this country more equal. The property-owning democracy was an eagerly embraced notion.
Government policy on home ownership has now gone into reverse. After the inducements to buy council houses of the 1980s come the cuts in mortgage interest relief and reduced housing benefit. Lower-income earners who want a mortgage will now have to take out private insurance cover for the privilege.
The changed climate in the housing market is likely to make Britons borrow less and save more for years to come. Britain is the only big industrial country whose savings rate, even at this stage of the recovery, is as high as it was 20 years ago. The rate of personal saving soared after the housing bubble burst.
In the long run this might be a good thing for an economy that has traditionally had lower savings than most other comparable countries. That does not stop the short-term adjustment being extremely painful, however.
Exchange needs to crack down softly How to wield a heavy hand with a feather-light touch. That is the conundrum with which the Stock Exchange is grappling on two separate, but related, fronts. Yesterday it announced, along with the other main City watchdogs, tougher disclosure arrangements which it hopes will put off those dealers aiming to manipulate the market just before the pricing of a big issue by forcing down share prices - the practice of short-selling. The new arrangements are specifically aimed at the imminent sell-off of the second tranche of electricity generators' shares.
The second front is the controversy surrounding market-making privileges, opened up recently by Swiss Bank Corporation's dealings in regional electricity shares. Here the question is whether market-makers should be subject to the same rules on disclosureas everyone else. At present they are allowed to hide large shareholdings on the grounds that enforced disclosure would make it difficult for them to operate effectively.
Both these issues are highly sensitive, because they deal with regulating - which is only another word for curbing - activities that are part and parcel of the daily, efficient functioning of the City. This is particularly the case with the British system of market-making, which provides the City with highly liquid equity markets. Which is why, whatever the opprobrium felt in some quarters about SBC's style, there is unlikely to be any serious effort to impose tough rules on market-making i n general.
Short-selling, the practice of selling shares not owned in the hope of buying them back at a lower price, is also common practice in the City and many other international markets. Most big hedge funds find their origins in the practice. To seek to stamp it out, or curtail it significantly, would be to render the markets less flexible, diminishing a key element of competitiveness.
There are plenty of other markets around the world where short-selling is outlawed or narrowly restricted - Tokyo is an example - but they tend to function in very different ways from London.
However, the fact that "normal" short-selling works perfectly respectably most of the time in London does not alter the fact that aggressive short-selling has been abused to drive prices down before some recent issues. There was evidence of deliberate short-selling to suppress the price in the Euro Disney, Eurotunnel, BT3 and Wellcome issues. Although the Stock Exchange admits it has no hard proof, anecdotal evidence supports the view of vendors that they got a far poorer price than they should have.
This is the nub of the problem. If big issuers feel they risk being fleeced by uncontrolled market manipulators, they will not use London, but take their business elsewhere. The Stock Exchange has to be seen to be doing something, but without being too heavy-handed. It would be unwise to take a sledgehammer to crack what after all is only an occasional nut, and in the process kill off orderly short-selling.
The new disclosure arrangements will help flush out the really aggressive short-sellers in the sensitive period leading up to the price setting of a big issue. It will then be up to the vendors themselves to punish those exposed, by not allocating them many shares. That is the only really effective sanction, and the Stock Exchange, by adopting yesterday's gentle approach, has conceded that. With luck, it has squared the circle by reconciling the interests of big vendors and those of free and unrestricted markets.Reuse content