NOT for the first time, the vultures are circling over the housing market.
America’s sub-prime mortgage market has sneezed, but some say we will end up
with the worst cold.
A piece in America’s Business Week warns of “Britain’s coming credit crisis” –
it claims that British house prices are 11 times the average salary (almost
double what they actually are) and says Britain could suffer a worse fate
than America.
The Treasury/Bank of England bailout of Northern Rock, Britain’s fifth-biggest
mortgage lender, has echoes of past banking crises and appears to confirm
the worst fears.
All those “ninja” loans (no income, no job, no assets) to trailer-park folk in
Florida will, it appears, send a cold wind blowing down Acacia Avenue. Hang
on to your hats.
The Royal Institution of Chartered Surveyors says housing demand fell sharply
last month so that a net 1.8% of surveyors reported a fall in prices
compared with the previous month. As recently as April, a net 27.6% were
reporting price rises.
This was bearish news, though not yet as gloomy as it sounds. This measure of
house prices has been in negative territory, often for long periods, in
recent years, without corresponding falls in the numbers produced by the
government, Nationwide, Halifax and other bodies.
Even more alarming, on the face of it, is the news from Rightmove that average
asking prices have slumped 2.6% this month. That, however, appears to
reflect mainly the distortion created by the introduction of home
information packs (Hips); the average being brought down by a 41% drop in
the number of four-bedroomed and larger houses being put on the market.
But the market has clearly cooled significantly, as predicted here on May 27
(“End of the house price boom is in sight”), and that cooling came before
the “shock” in the money markets. Could that shock be enough to tip prices
over the edge?
Let me examine this in more detail. The first thing to worry Acacia Avenue is
rising mortgage rates. Last week the Bank of England reported that the
average standard variable rate set by banks and building societies rose to
7.69% at the end of August, up from 6.4% a year earlier, and the highest
since early 1999.
The rise so far, it should be noted, has little to do with rising money-market
rates and everything to do with rate hikes by the Bank’s monetary policy
committee (MPC). In a period when Bank rate had risen by 1.25 percentage
points, the standard variable-rate mortgage rose 1.29 points.
The Bank’s data suggest there hasn’t been much relief over the past year in
terms of fixed-rate mortgages. Since the MPC started raising rates, average
increases have ranged from just under a percentage point for five-year
fixes, to just over a point for two and three-year loans.
A little bit of history is useful here. The last time mortgage rates were
higher than this was in the autumn of 1998, following the Long Term Capital
Management hedge-fund crisis, probably an even more puzzling event for the
average homebuyer than this one.
Then, as now, the MPC – a mere fledgling – had raised interest rates. On top
of that, money-market rates increased.
The effect was to push the average standard variable mortgage rate up to
8.87%. Fortunately, help was at hand. Rates eased lower in the money markets
and the MPC cut interest rates aggressively. Six months later, mortgage
rates were down by two percentage points.
No two crises are the same. The statement that Mervyn King, Bank of England
governor, made to the Treasury committee last week suggested the MPC is in
no rush to cut Bank rate until it is sure the economy is being hit. As in
1998, the immediate money-market crisis will pass and homeowners can take
comfort from the fact that rate hikes are off the agenda and that the next
move should be down.
There is also an element of swings and roundabouts for mortgages in that, as a
result of that shift in Bank-rate expectations, fixed rates are coming down.
Two-year “swaps”, on which many fixed rates are based, have slid from 6.34%
in mid-July to below 6%.
This is a test for Britain’s housing market. My argument has been that house
prices will not fall significantly unless we have a recession and the
authorities lose control of monetary policy. That remains my view. An
American housing crisis that has yet to produce a slump in prices on the
other side of the Atlantic – national house-price measures are either
modestly down or modestly up on a year ago – should not lead to one here.
The Bank has not lost control of monetary policy, though the crisis in the
markets will do part of its job for it by raising the price of credit and
tightening the terms on which it is available.
The economic backdrop also remains healthy. Figures last week showed that
employment rose by 84,000 to 29.1m, the highest since comparable records
began in 1971. The number of jobs in the economy stands at 31.7m (some
people have more than one), up 280,000 in a year and the highest since this
series started in 1959. Job vacancies are up.
Globally, the fact that oil prices nudged above $80 a barrel last week was not
good news for motorists, and won’t help the inflation numbers. But it is
hard to believe traders would have pushed it to that level if they thought
the world economy was about to collapse, and with it oil demand.
This is still, in many ways, the phoney-war period. The credit-market crisis
continues to unfold but we still do not know how serious its effects on the
real economy will be. King’s assurance that the turmoil “should not threaten
our long-run economic stability” does not preclude some short-term
instability. But the effects so far, despite some scary headlines, are
modest. New borrowers should not lose too much sleep over an increase of a
tenth of a percentage point or so in the cost of tracker loans.
If the autumn 1998 parallel is anything to go by, the MPC will know that it
needs to cut interest rates when the Bank’s own agents tell it that business
and consumer confidence have slumped. That happened between September and
October in 1998. It does not appear to be happening now. Yet.
PS: In 2002, Sir Derek Wanless published his report on the National
Health Service for Gordon Brown, Securing Our Future Health: Taking a
Long-Term View. Last week he revisited the scene of the crime.
His assessment five years on, published by the King’s Fund, is that, despite
a 50% increase in real spending on the NHS since 2002, we are a long way
from having a world-class health system. The explanations are familiar. NHS
productivity is poor, costs have gone up and the extra money has not been
well managed. Wanless, who hoped five years ago that the public would become
“fully engaged” in improving their health, reports a rise in obesity worse
than in his gloomiest scenario. After a trip to my local cinema, seeing the
industrial quantities of popcorn and cola consumed, this does not surprise
me.
Nor should Wanless be surprised. In his recommendation to Brown in 2002, he
warned that 7%-plus real growth in spending was “at the upper end of what
should sensibly be spent” and it assumed that the NHS would spend the
doubling in its IT budget productively.
That was never going to happen, and so much of the 7.4% a year real growth in
spending of the past five years has been wasted. The latest Wanless report
says that if spending slows to 3% a year in this year’s spending review, the
NHS will suffer a shortfall by 2011 of between £7.2 billion and £15.2
billion. The government, it appears, needs to keep the taps turned on.
That, it seems to me, would be exactly the wrong thing to do. The
loads-of-money strategy hasn’t worked. Thin gruel may be a more effective
prescription.
david.smith@sunday-times.co.uk
