So what's to be done about the mortgage famine? The number of new mortgages approved last month was just 30 per cent of the level of a year ago, and lower than during the trough of the early 1990s. The report yesterday by Sir James Crosby, the former chief executive of Halifax Bank of Scotland, explained why.
The banks cannot make more loans because they don't have the money to do so. Since 2000, some two-thirds of new British mortgages were parcelled up and sold on to other lenders, often abroad. Since the global banking crisis of last summer that market has been closed: no one wants to buy British mortgages. Meanwhile, the wholesale money markets, where banks lend to each other in large amounts, have been functioning pretty badly.
As a result, the lenders have had to rely on the funds they can get in over the counter, which are more limited. That is why they are offering all sorts of high-interest deals for savers. How long before the supply of mortgages recovers? Probably about three years.
The report goes into much more detail but if it is long on analysis it is short on solutions. Sir James does not like an explicit government guarantee for home loans, or a scheme such as they have in the US with institutions that have an implicit guarantee. He looks at the idea of extending to new mortgages the present special liquidity scheme that the Bank of England has been running to enable banks to swap old mortgages for government securities.
He makes some more technical suggestions about how the secondary market in mortgages might be improved, but that is about it. This is an interim report and come the autumn there may be more specific suggestions, but with an insouciance that you have to admire, Sir James warns he may make no suggestions for government action at all.
There is a further issue noted in the report. The problem is not just a lack of supply of mortgages: there is also a lack of demand. If house prices are going to fall by somewhere between 10 per cent and 30 per cent over the next three years, first-time buyers would be advised to hang about for a year or so. There is also a fall in the supply of homes on the market. Since people have been trained to expect house prices to rise, they are resistant to the idea of cutting the asking price. Result? Paralysis, or at least something pretty much like it.
Politically, this is pretty toxic. There is obvious pressure on the Government to do something, but its options are limited. The housing market is too big relative to public finances, which in any case are in poor shape, for it to be able to make a material difference to house prices. The value of British housing stock is falling by about a billion pounds a day. The government borrowing requirement this financial year will be about £50bn. It cannot reasonably increase that by more than a few billion, so the idea of it lending enough directly to stabilise the market is absurd.
The idea that the Bank of England might extend the special liquidity scheme to new loans makes more sense, provided it was only top quality loans that qualified. The Bank does not like the idea, I think largely because it does not want to rescue the banks from their previous errors.
You could argue too that lenders are doing no one any favours by making loans on assets that are likely to fall in value. But all central banks have a duty to protect the solidity of the banking system, however stupid the banks have been, and you could make a good case that helping maintain a flow of new mortgages is part of that duty.
Other ideas have been mooted, such as having local authorities and housing associations buying unsold properties, but there are powerful objections to that. One is that the amount of funds available would do little to stabilise the market; another that these organisations have a fiduciary obligation not to waste public money, and to buy homes on a falling market would be to abuse that.
But if it is not possible to do much to tackle the root causes of the problem, and the numbers are too big for that, there does seem to me to be a strong case for mitigating its impact on the economy as a whole. Whatever this government and its successor do, the supply of home loans will be difficult for the next three years or so. Sir James is right about that. That will inevitably lead to a sombre housing market, which may run into 2011 or 2012.
By then – and this is much more hopeful – money incomes will have risen by 15 per cent or so, and with some further falls in nominal house prices, the ratio of house prices to average earnings will be back to a reasonable level. Once that happens, house prices can start to advance again, though hopefully not in the way they have shot ahead during the bubble years.
So, the trick will be to make sure that what will continue to be a difficult housing market does not sabotage the real economy of the country. Here, again, I think it is possible to be reasonably optimistic. At the moment, the economy is still growing, albeit slowly. Living standards are being squeezed partly by the increases in taxation planned by Gordon Brown but also by the surge in global energy and commodity prices.
There is nothing that can be done about the former, but the latter will get better. It is possible that we have already passed the peak in oil prices, and by next summer it is quite plausible that inflation will be coming down towards the 2 per cent central point that the Bank is supposed to target. Then interest rates should be falling fast.
We will need that, because next year will be difficult for the economy. There are some forecasts of recession around, and that may occur, but whatever happens it will be a period of very slow growth. But, and this is important, I have not seen anyone suggest that this downturn will be as serious as that of the early 1990s. The housing market may be as tough as it was then, but the economic downturn won't be. So there.Reuse content