….and what the unlovely Chris Huhne is doing to ‘help’.
Whereas the Gormless Frown needed to keep inflating our housing bubble to ensure the booming economy generated enough tax revenues to fund his public spending splash, Draper Osborne needs to find ways to stop the housing market imploding.
The steady slide that resumed in the middle of last year has accelerated: prices are now about 20% below their peak in real terms, and the latest Halifax survey showed house prices fell 1.4% in April – far more than the ‘expected’ 0.1% increase. Bank of England figures also show transaction levels running at half the level in the years before the financial crisis, while the level of mortgage lending continues to fall.
But this is about more than just voter backlash and Estate Agent bonuses. To stop the the U.K. sinking into an economic slump – with a sovereign debt heading the same way as Ireland and Portugal – the Chancellor must avoid a housing crash at all costs. His humour will not have been improved by Mervyn King hinting this morning that interest rates will start to rise by the end of this year.
A serious possibility from such a crash would be bank balance sheet devastation, and The Slog understands this is one of the biggest concerns facing the Monetary Policy Committee. King alluded to these anxieties last week when he warned “the economic consequences of high-level indebtedness would become more severe if rates were to rise”.
What he’s talking about is another Tsunami of toxic consumer debt that finally (along with stupid derivative bets and lending to Russia) sends RBS at the very least tumbling over the cliff. Similarly, the old HBOS mortgage book now glowing away inside Lloyds does not bear thinking about.
But this in turn will mean consumers even less willing to spend than they are now – and a sky-rocketing welfare budget to care for those tossed out onto the street after handing in their house keys.
The Slog’s view remains that the house price slide represents a new and as yet uncharted era within which the entire mortgage market model will be shown to be flawed. MPC member David Miles argues the opposite: that the slump in house prices is temporary – and he has a model which (he insists) proves it. But one new future overwhelms a thousand models based on the past.
HSBC, which has up to £75 billion to lend globally, is barely extending any mortgages above 60%. Lloyds Banking Group, is not offering loans above the 70% lender-risk level.
A market with no up-trade demand or first-time buyer affordability is bad enough; one starved of credit at the same time is a crash waiting to happen. We also need to be clear about one terrifying fact: that confluence of nasties has last happened in 1973.
One reason among many for banking loan conservatism is the closely watched stress-testing now ubiquitous across all lenders. An 85% loan-to-value (LTV) book would be interpreted by the testers as being negative equity, thus requiring further liquidity provisions. Also – under the new Basel capital rules – the higher the LTV, the more capital banks must set aside.
As with so many things, regulation has as many unforeseen ramifications as just letting things rip. But although Britain’s mess is multidimensional (expensive imports, falling trade, dues owed to the EU, youth unemployment, a stuttering cuts programme, bank bailout liabilities and a poor savings ratio) fears of negative equity that turn into homeless reality will mean decimation in the high street, desperation among the electorate, and a flatlining property market swamped by auction fire-sales.
So you’d imagine that, with the rental sector certain to grow as ownership falls and loans fail, the Coalition would be on the ball – when it comes to freeing up and expanding rental accommodation to cope with that shift.
Well, Chris Huhne is clearly on something, but it isn’t the ball. Under legislation he is about to introduce, landlords will face fines if they fail to install EU-friendly insulation in their properties. The Association of Residential Letting Agents has voiced concerns that some landlords will just not let property, rather than carry out refurbishment. And while I accept that there’s an element of ‘they would say that’, the Fluffies in both the LibDems and Labour never, ever seem to grasp commercial realities….and the need for some things to go on the back burner.
The flaw in Britain’s housing market is the same as that within globalist free-market Friedmanism: it depends entirely on cheap credit, services, young high-earning first-timers and unwise consumption in order to keep it going. So it’s good to see that, as ever, a Leftie like Chris is spending public money as an alternative strategy.
I’m all for alternatives to Milt ‘Mad’ Friedman. Just not Chris Huhne’s alternative. The bloke is an idiot; and as part of their local election-slaughter price for staying in the Coalition, the LibDems will continue to push such lunacies onto the Statute Book. Every day, these people must thank their lucky stars that they’ve bedded down with a Prime Minister too bland and cowardly to face the electorate. For he is a Prime Minister without the political nous to realise that, were he to threaten them with a new General Election, they’d wind up smaller than UKIP.
FOOTNOTE: John Redwood apparently asked some fairly searching questions of The Huhne in the Commons yesterday. He wrote on his blog – http://www.johnredwoodsdiary.com/ – this morning:
‘I was mainly interested in how the government plans to keep the lights on. I asked [Huhne] how many new power stations had been approved in his first year, and how many additional stations he hoped to approve and get into build this year. I was told I had to wait until the autumn for an answer. I just hope decisions about the new power stations we need are being made more rapidly than the questions are being answered….’