Sunday, June 29, 2008
Time to ease the loan stranglehold
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Something extraordinary is happening in the housing market. We are seeing an unprecedented collapse in mortgage lending and no sign of an official or private-sector response.

Housebuilders are hurting badly, as are others that rely on a thriving housing market for their livelihoods. Nobody, however, seems prepared to do much about it.

This week we will get figures from Nationwide and it will be a surprise if they do not show an eighth consecutive monthly fall in prices and a big one. May's drop was a scary 2.5%.

I have been puzzling about why Nationwide and Halifax surveys have been showing such sharp price drops, at least as bad as at the corresponding stage of the early 1990s slump, when economic conditions are more favourable today.

Lenders are taking a more aggressive approach to cutting valuations on which they are prepared to lend. That, though, reflects only part of the weakness.

The real story is that the credit crunch is indiscriminate in its impact. In the early 1990s, peak-to-trough price falls on the lenders' national price measures were not that large, given how devastating the crash was. The Halifax index fell 13%, the Nationwide 20%.

Many people remember rather bigger falls than that and are right to do so. What we had was a "normal" price correction, beginning in London, southeast England and East Anglia and spreading to the rest of the country. The effect of this ripple pattern was to limit the drop in the national measures at any one time. In 1990, for example, the Halifax index showed no change. Prices fell 12% in East Anglia, though, while rising 13.6% in the north.

This time all regions are suffering together. So sudden is the downturn that few parts of the country are immune. The ripple pattern has been compressed.

We can see the sudden nature of the adjustment in figures for new mortgages. Last week the British Bankers' Association (BBA) reported real shockers, with new-mortgage approvals of only 27,968 last month, 20% down on April and 56% down on May 2007.

Again, this did not happen in the early 1990s. The kind of collapse in lending we have seen over the past 12 months took four years then; there was a 57% drop between 1988 and 1992.

It is important to recognise that the credit crunch is the driver of this downturn. This is not an implosion of the housing market under the weight of its own overvaluation. It is not a wave of forced selling by homeowners who got in over their heads. It is not a sudden and unanticipated collapse of demand. It is not a rush for the exits by buy-to-let landlords.

All these things may yet happen, but the cause is clear: a sudden and sharp drop in mortgage availability, combined with a rise in their price. Can anything be done? Should anything be done?

The extent of the crunch can be seen clearly in the numbers. The Council of Mortgage Lenders (CML) expects gross mortgage lending of 285 billion and net lending of 55 billion this year half 2007's 108 billion.

About 40% of the stock of UK mortgages is funded not by customer deposits but by wholesale funding senior debt, mortgage-backed securities and covered bonds. This time last year 60%-70% of new lending was funded in wholesale markets. When those markets closed last summer, lenders were stuck, Northern Rock particularly so. When they stayed closed, the result was a mortgage famine of a kind we have never seen before.

BBA numbers show how this is biting. Existing borrowers are not doing badly. Remortgages moving the same amount to a new lender totalled 63,303. Equity-withdrawal mortgages, when people change lender and borrow more, were 28,766, against fewer than 28,000 new mortgages. So there were more equity-withdrawal mortgages than new ones. First-time buyers are becoming extinct. Who is responding?

The Bank of England's special liquidity scheme, launched in April, may have played its part in keeping the banking system afloat, but has had zero impact on the mortgage market. Also in April, Alistair Darling announced that he had appointed Sir James Crosby, former chief executive of HBOS, to head a working group to report on possible remedies for the malfunctioning mortgage market.

I am not blaming Crosby, but Treasury wheels grind exceedingly slow. His interim report is not expected until late next month, nearly a year after the credit crisis broke, and his final report will not be until autumn. Caroline Flint, housing minister, told the Chartered Institute of Housing annual conference that officials were pulling out all stops in search of a solution, but evidence of that activity is hard to see.

The CML has been talking to the government about a plan to revive wholesale funding markets but is coy on the details. It says there is a solution that would not involve a transfer of risk to taxpayers. Part of it may be the Bank taking new mortgages, as opposed to pre-2008 loans, on to its books as collateral.

The New Local Government Network has called for something outlined here a few weeks ago that the government, through local authorities, should get back into the mortgage market, as was the case until the early 1980s. Even with a big budget deficit, the government does not face serious funding constraints. When things improve, those mortgages could always be sold on to the lenders.

If there are fixes out there, somebody in government should be putting them into practice. As it is, there is an overwhelming sense of inaction.

Why, you might say, should the government do anything? Those who lived by the housing market should also die by it.

Nobody, however, benefits from a disorderly correction, or a malfunctioning mortgage market. First-time buyers are worse off than they were before. The housebuilding industry is suffering a downturn from which it could take years to recover. A government that prided itself on stability now risks presiding over extreme instability.

Steve Nickell, head of the government's National Housing and Planning Advice Unit, believes that current developments will exacerbate medium and long-term housing shortages. Prices may be falling now but the long-term trend is "relentlessly upwards", he said in introducing a new report last week. If the market overshoots down now, it will overshoot up again next time. It is hard to see that is in anybody's interest.

PS: Tough though it is for housebuilding, not all builders are struggling. Ian King, The Sun's business editor, tells me you can't move for scaffolding in his part of London. I can report my skip index is alive and well. This is not just anecdote. The Federation of Master Builders says some members have switched from new developments to loft conversions and other private work. A GE Money survey uncovered something similar.

What's going on? It may be a bit of "can't move, will spend", where people decide a house move is not worth contemplating now, so why not improve? For the cost of moving, in particular stamp duty, you could build a decent extension.

Though official retail sales numbers for May were taken with a pinch of salt, the CBI's latest distributive trades survey, described as "another difficult month for the high street", was better than April or May. Consumer credit is easier to obtain than mortgage finance. Retailers are rolling out summer sales, but no earlier than normal.

The great debate was about whether the housing downturn would leave consumer spending unaffected or push it lower. What we didn't expect was weak housing associated with stronger spending elsewhere. It may not last the Bank would be alarmed if it did but for now we should treat tales of extreme woe from the high street with care.

From The Sunday Times, June 29 2008