The oddest thing about this slowdown and credit crunch is the delayed reaction – or the lack of reaction – of the UK housing market. Shares have slumped. Commercial property prices have fallen substantially. Retailers have complained about the squeeze on their customers. Yet house prices are still slightly up on a year ago, and the last few months have seen only small declines in the national house price figures.
High Stamp duty, Home Information Packs and higher mortgage and transaction costs must be encouraging people to sit tight and not move. The market has been short of homes to sell, just at the point when otherwise it might have gone down. Fortunately unemployment has not been shooting up, and most people have been able to meet their mortgage payments even though their budgets are under more pressure. There has been an uneasy equilibrium created by inertia and the new impediments to selling and buying.
We may still, however, be in a for a slow but painful decline in house prices. There is plenty of evidence that new buyers are finding it more difficult to obtain a mortgage. Gone are the deals offering total borrowings in excess of the house price, and gone are the days when you could get by without much of a deposit. US interest rates may be plunging, but UK general rates are much stickier, and banks and building societies are keen to rebuild margins by charging more for a mortgage relative to the general level of interest rates.
There are those who say they do not think lower interest rates will make any difference to the Credit Crunch – indeed that seems to be the fashionable position. They link this with fears about inflation in the UK getting out of control if any action is taken to cut rates. This is a strange misunderstanding of the position.
Lowering the general level of interest rates could be crucial to avoiding the slowdown of the housing market becoming something worse – a price crash. As part of the Credit Crunch is the banks’ unwillingness to accept mortgages when lending to each other, anything that makes it more likely more people can pay their interest on the outstanding mortgages would be good news. Surely more people will be able to afford the mortgage if the mortgage rate comes down, than if it stays up or even goes higher? In the USA the authorities have grasped it. They are fighting the battle of the bulge of the sub prime. If too many sub prime mortgage holders give up on the mortgage, then the losses will multiply through the banking system and more credit will be destroyed. The UK may not have had such an extreme version of sub prime lending as the USA, but similar dynamics apply in our housing market.
If the UK house price slide gathers pace, then more people will be in negative equity where the home is worth less than the mortgage. If more people lose their jobs, more will struggle to pay the high mortgage bills they currently face.
Meanwhile, many people are struggling with an inflation rate much higher than the official figures suggest. There is the shock at the petrol pumps, the increase in Council Tax, the surge in electricity and gas bills and the hit on bread and meat. The public sector is at last taking a tougher line on public sector wages. There is no evidence of inflationary pressures building up on private sector pay, as the market for goods and services is still competitive enough to make passing on big cost increases difficult. Private sector bonuses, especially in the financial sector, will be well down, deflating total remuneration. All this makes it uncomfortable for many people to pay the bills and get to the end of the month with something to spare.
It also means the UK authorities should not worry too much about inflation. We are living through the worst of it now. They should worry much more about slowdown and credit squeeze, which will curb price increases in due course but could do lots of other damage if allowed to get out of control. I urged the government to do more to relax the squeeze in my speech during the Budget debate.