Itâ€™s April 9th and thereâ€™s frost on the ground. Once again there is no Parliament to go to, as Parliament has been sent away for another fortnight off. It means we cannot cross examine Ministers on falling house prices, the continuing credit crunch, the IMF downgrade of their UK economic forecasts, the unseasonal weather, the squeeze on peopleâ€™s incomes, Northern Rockâ€™s business plan, the availability and price of mortgages or anything else on peopleâ€™s minds. We can hear and see some Ministers on radio and TV, blog away and then go canvassing for the local elections. On the doorsteps we hear about high taxes, rising mortgage payments, and many complaints about the state of the nation.
This morning the Chancellor told us he is reviewing mortgage finance. I had a feeling of deja vu. This government has endlessly reviewed the housing market. They used to tell us housing was not affordable, implying they wanted house prices to fall, although they always ducked the question when I asked them by how much they needed them to fall to make housing affordable. The first Barker review considered house prices mainly by looking at number of new households forming compared to numbers of new homes being built, and concluded the answer to making homes more affordable was to build a lot more. As one of the few critics of that piece of work, I pointed out that you need to look at the supply and demand for mortgages as well as for homes â€“ that interest rates and credit availability are crucial in working out where house prices will go, and working out how many people can afford what kind of homes. The government in its second consideration of housing came to agree that mortgages and finance were also an important part of the complex equation. They have to understand that unlike most markets, where the price of the new product offered makes the market, in the case of housing it is the price of second hand product which dominates, so you cannot control or run the market simply by working on the housebuilding side.
They are now learning the hard way that there is one thing worse than rising house prices with some people prevented from buying because homes are dear â€“ and that is falling house prices, with even more people prevented from buying homes because there is a shortage of finance. With rising house prices most of the people in their own homes are content â€“ save those worried about the prospects of an immediate family member getting on the ladder â€“ but that does not mean they want their own home to fall in value. With falling house prices most homeowners get worried. As their wealth falls, so they become less inclined to spend money and less able to take risks. If at the same time many more people are excluded from buying a home of their own because deposit requirements are raised substantially and mortgages are made scarcer and dearer, it removes any potential feeling of wellbeing for families.
What are the options for this review of mortgages and housing at the governmentâ€™s disposal? They boil down to the following:
- The Bank can cut its recommended interest rate. Whilst market rates often detach from this in current circumstances, a lower Bank rate will tend to create lower mortgage rates than otherwise, so it could help. The Bank is likely to cut rates at the April meeting.
- The Bank of England could move more in the direction of offering more liquidity to the banking system. It should accept as collateral a wider range of assets, but demand sufficient asset cover to protect taxpayers. The more liquidity it offers, the more mortgages can in turn be offered by the credit creating commercial banks.
- The government can subsidise more people to buy homes, along the lines of the small schemes they have announced this week. This is heavily constrained by the poor state of the public finances where more public spending is not readily financed, and by the unfairness of helping a limited number of people and not everyone with their mortgage problem.
Part of the key to the mortgage problem in the UK lies with the governmentâ€™s nationalised mortgage bank. I had several reasons for thinking this a wrong decision. Two of them relate directly to getting out of the mortgage famine we now find ourselves in. The Bank of England and Treasury needs the Â£24 billion back it has lent to Northern Rock, to give it more cash to use to make the general market more liquid. Requiring early repayment means even fewer mortgages available in the market, as each of the Northern Rock mortgages repaid so the taxpayer can be repaid will need refinancing by another mortgage company. Secondly, because Northern Rock is nationalised it cannot offer too much competitive product in the market, because it would then break EU competition rules. So we have to live with a situation where the need for repayment coupled with the competition position means that a previous large lender has withdrawn from the market, fuelling the scarcity of mortgages. The government needs to work out what the optimum balance between repayment of money owed to the Bank and mortgage withdrawal by Northern Rock is in such circumstances. It also needs to find a way to offset some of the negative effects of Northernâ€™s withdrawal on the rest of the market.
The best combination of responses is to concentrate on freeing the wholesale markets for banks more by Bank of England open market operations and interest rate cuts. It will be the quickest acting. If market interest rates can be brought back to their old relationship with Bank rate we will know we are moving in the right direction.