18
Apr
HOME ECONOMICS
Courtesy of The Sunday Times, ‘Home’ April 13th 2008
Diana Choyleva presented an excellent report and over view of the
market which makes interesting reading. HOME ECONOMICS A
combination of unaffordable house prices and the credit crunch has
pulled out the rug from beneath the housing market, but a crash
similar to the one we suffered in the early 1990s is unlikely.
House prices are set to fall further, but a correction of about 10%
over two years should be enough to make them affordable again.
Contrary to popular belief, it was only in the second half of last
year that house prices in Britain became unaffordable, as a result
of the revival in the property market the previous year and the
aggressive interest-rate hikes that followed. Even then, according
to the index we have developed at Lombard Street Research, which
looks at prices in terms of mortgage rates as well as household
income, the problem was not as great as a decade and a half ago. As
house prices have become unaffordable, so mortgage demand began to
wane. Mortgage approvals have plunged 43% from their peak in late
2006, suggesting further weakness in the demand for property. Worse
still, the banks have become unwilling to lend. What started as a
problem with reckless mortgage lending in America has turned into a
global liquidity and credit crunch. In recent years, banks have
been granting loans to home buyers and selling them on as
securities, off-loading the risk. That is over now. If banks want
to lend in the future, they will have to bear the risk. The more
loans they give, the more capital they need. At present, though,
the banks’ ability to grant new loans is being constrained by
inadequate liquidity and capital. This explains why they want to
charge more, to deter new customers. Gone are the days when you
could walk into a bank and be offered a 125% mortgage deal.
Ultimately, the Bank of England can provide the banks with as much
liquidity as they need. But there is little the central bank can do
to alleviate the capital constraint. The credit crunch means it
takes longer for cuts in the Bank rate to lead to lower mortgage
rates. Banks are in this business to make money, however, and they
will benefit from improved margins. Fortunately, the UK banks were
less reckless than their counterparts in America and do not face
serious solvency problems. It should not take too long before they
regain the willingness and ability to lend. Despite the credit
crunch, mortgage rates here are far from the double-digit levels of
the early 1990s. Another crucial difference concerns the labour
market, which has been fairly resilient so far. The UK economy
needs to correct, with growth set to slow sharply. But the workout
of the current domestic imbalances should not be as prolonged as
during the previous market downturn. Unemployment is set to rise,
but we are unlikely to see the kind of surge that would lead to an
avalanche of forced house selling. A moderate correction in the
housing market will be part of the solution, not the problem.
*Diana Choyleva is director and head of the UK service at Lombard
Street Research *home.economics@sunday-times.co.uk