BrightsaleHas Sir James Really Slain the Mortgage Lending Dragon?
Well he did his best. After his interim report in July was positively tepid in its support for direct Government intervention in the mortgage markets, Sir James Crosby finally got off the fence in his full report (published with the pre-budget report this week). In fact he went from lukewarm to ‘shock and awe’. Without direct Government intervention in the wholesale mortgage markets he predicted that it was “very likely” that net mortgage lending would fall below zero in 2009. Yes BELOW ZERO. This means that the amount of mortgages being paid off would exceed the sum of new lending. To put this in context, in the year to Sept 2007, Bank of England data shows that net residential lending totalled £ 84.7 billion. In the year to Sept 2008 this had slumped to £37.4 billion. Lending is down a little over 50% and sales transaction volume is down – well yes, around 50%. So if net lending falls to zero, then transaction volumes go to? The spectre of a virtually closed housing market looms up before us.
Sir James proposes to lance this terrifying apparition with a good old fashioned dose of nationalisation. He proposes that the Government should guarantee £100 billion in new mortgage securities (on a temporary basis) in 2009 / 2010. But the problem is that Sir James has does not actually possess a lance. The lance is held by Chancellor Darling. But will he actually use it? Many in the industry drew heart from Mr Darling’s response to Crosby’s full report yesterday, but the optimism needs to be tempered. Mr Darling certainly did not say he would definitely adopt this proposal. In fact he was very clear that he could not adopt it without clearance from the EU. In fact, looking at the exact language used by Mr Darling he only committed the Government to “proceed to work up a detailed scheme based on Sir James’s recommendations”. Given that the budget is not until next March this hardly smacked of a urgent response to a pressing problem.
Our sense is that Mr Darling is very much keeping his options open, waiting to see how other factors play out before deciding what actually to do about the mortgage market. The problem is that the Government’s balance sheet is ballooning at an alarming rate. Adding another £100 billion in the form of Government-backed mortgage would be a massive decision, and EU approval for such aid is by no means guaranteed.
And then there is the issue no one seems to have noticed. Many Westminster watchers are shortening odds on a Spring 2009 General Election. Were this to occur and Chancellor Osborne took over would he feel similarly constrained to implement Crosby’s bail out? Given what both he and David Cameron have been saying about the Government fiscal “irresponsibility” surely the answer is no.
We support measures to ensure the stable and proper functioning of our mortgage markets. Without them, Britons could become virtual prisoners in their own homes in 2009 and 2010. But homeowners and estate agents have to prepare themselves for the fact that 2009 could be very difficult indeed. They must not be lulled into a false sense of security and believe that Sir James has definitely ridden to the rescue. Homeowners who need to move in the next 12-18 months should get their properties on the market now and should price them sensibly. There are still mortgage-approved buyers out there, but undue delay or unrealistic pricing could yet mean tangling with a real dragon next year. There is no time for delay.
Tags: chancellor, economy, housing-market, mortgages, predictions, research
November 26th, 2008 at 11:10 am
This was a thoughtful post and well judged. It is telling also that Mervyn King came out strongly against the idea (calling it a “big mistake”) and said that wholesale mortgage markets had dried up for “good reason”. The FT this am has also come against the £100 billion bail out idea and noted (quite rightly) that encouraging us all to start buying and selling houses feverishly is simply not a priority right now. The Government needs to focus its help on small businesses and those at the bottom of the social ladder. Bailing out the estate agency market is going to have to wait I am afriad.
November 27th, 2008 at 6:27 pm
Twenty-five years of the credit buble have piled debt upon debt upon debt as people disdained saving for what they wanted and instead took on debt in a childish desire to have everything immediately.
Gordon Brown could be no help. Incapable of recognising a credit bubble for what it was, he deluded himself into thinking he’d wrought some kind of economic miracle. He’s destined to go down in history as the Harlequin leading this carnival of fools.
Finally we receive reports that next year, some of this gigantic pile of debt will be reduced rather than added to. We should celebrate that good sense will finally prevail. Instead though, everyone seems only to regret that we cannot somehow squeeze just a few more months out of the bubble, even if it means the government too must recklessly add the the millstone of debt around our necks.
We’ve had the party and we’ve trashed the house. We’re going to have to pay for the damage and we’ll be grounded until we do. Isn’t it finally, at last, time we grew up and started acting like adults?