BORN optimists — by which I mean British homebuyers — will find in the PwC report on the housing market many reasons to maintain a sunny disposition.
PriceWaterhouseCoopers warns that if trends continue as they have since the 1970s, then there is a one in three chance that house prices will have fallen by 2010. Then again, people who tend to see the glass two-thirds’ full will note that PwC says that there is a
65 per cent chance that house prices will be higher. In fact, a 27 per cent chance that they will be up to 10 per cent higher and a 38 per cent chance that they will be more than 10 per cent higher. PwC games out a whole bunch of scenarios, but at its rosiest it says that the chances of a fall in property prices between now and the end of the decade is as low as 7 per cent.
The odds on house prices continuing to rise are shortened by Abbey’s decision to relax its mortgage lending criteria. Instead of the traditional cap of three or three and a half times gross salary, Abbey will be prepared to extend loans of five times earnings to its better-off customers.
This may just be an aberration. Certainly Banco Santander, Abbey’s new owner, needs to produce some eye- popping new products if it is to spruce up Abbey’s poor reputation with consumers and start rebuilding the business. This may just be a short-term loss leader, designed to put some pep in a tired brand.
But the signs are that this is more significant and may pave the way for a seismic shift in how much gearing banks and home buyers are prepared to tolerate. Just as more and more debt has transformed the dynamics of the private equity industry, so home owners and lenders may be learning to love — or at least tolerate — leverage. Bank of Ireland and Bristol & West have already relaxed their lending criteria, though not as far as Abbey.
New money tumbling into the pool of finance available for homebuyers can mean only one thing, given the inelasticity of supply of new housing: more house price inflation, leaving homes just as far out of reach as ever for many first-time buyers.
A fundamental change in the terms of mortgage lending will further stretch the already elastic link between house prices and indvidual earnings. This will add to the uncertainty that bedevils economic policymaking.
Mervyn King was quite candid this week about the bafflement at the Bank: “It’s not easy for us to understand why house prices relative to conventional earnings are as high as they are,” the Bank of England Governor told the House of Lords. He attributed it to the low level of long-term real interest rates.
Higher loan-to-income multiples obviously increase risks for borrowers. A huge proportion of take-home pay will be swallowed up by monthly mortgage payment. Even a short spell of unemployment could spell trouble in meeting those obligations.
But this is the lookout of the highly leveraged homebuyer. And so long as inflation remains subdued, and lending rates remain half of what they were 15 years ago, there is no reason why borrowers can’t afford more than in the past. The risk to the banks is also modest. Abbey is insisting on a 25 per cent deposit, meaning that house prices can fall by the same proportion before it suffers serious pain from defaulting customers.
There is inherent risk in the housing market, but aggressive lenders and ambitious buyers are most likely to reinforce the upward trend. This looks like rational exuberance.
Hard journey
TRAVEL companies are at the awkwardly sharp end of two quite different influences on British business: the threat of terrorism and the opportunity of the internet. MyTravel, the former Airtours, has not made a profit for five years. It managed to respond to cheap do-it-yourself internet travel sites by cutting back the cost structure and cutting out 10 per cent of the package holiday capacity it was offering to UK consumers.
Then came the spectre of terrorism. Coming after the July 7 suicide bombs in London, the concerted attack allegedly planned for flights from UK airports showed appears to have delayed any recovery in demand.
MyTravel should still return to profit this year. Mergers with First Choice or other rivals are next on the agenda but safety in numbers is not, in itself, a long-term strategy.
MyTravel looks prone to bouts of recurrent turbulence.
Advertising is a matter of style
ON THE back of a napkin at the National Television Awards, Andy Duncan did a calculation that showed Google will get a greater share of the advertising market in 2006 than Channel 4. This is less momentous than it sounds — not a tipping point, as much as a see-saw moment.
Mr Duncan, the C4 chief executive, estimates that the internet giant will earn £900 million in advertising revenue this year, overtaking the channel’s forecast £800 million.
Mr Duncan has his own reasons for sounding the alarm. Channel 4’s financial future is under review from Ofcom, while ITV, its chief rival for television advertising, has been trying to resuscitate the debate about privatisation. This is an opportune time for Channel 4 to make the case for government protection, posing as the puny but brainy child in danger of getting his lunch money stolen by bigger kids.
Television is not about to be rendered obsolete by the web. Carphone Warehouse reaches a different audience in a different state of mind by sponsoring Big Brother than it ever could stitching ads to online searches for World of Warcraft and Britney Spears.
Advertisers, like content producers, are coming to appreciate what differentiates the experience of watching television from that of using the web. No doubt, with Google’s acquistion of YouTube, the TV screen and the computer screen are eliding. But content is not blurring across all platforms all at once. Each medium is developing its own style of content, its own breed of advertising. Online advertising will not simply replace TV advertising, it will redefine it.
- IT’S Thursday. So which hedge fund will Morgan Stanley buy today? Three deals in three days makes Morgan’s John Mack look like an odd-lot trader buying at the top of the market to make up for time lost under his predecessor. Two out of the three are just financial stakes that seem to add nothing to the group’s core business or professional skills. As Morgan Stanley has shown before, however, bizarre minority investments made when prices are high can turn out pretty well. The Morgan consortium that bought Canary Wharf makes more profit by the day.
james.harding@thetimes.co.uk
