Can the government rescue the mortgage market? This question is being asked today by the governmentâ€™s own adviser, as if the mortgage market can be sorted out in some kind of a vacuum, detached from the rest of the banking sector.
I can understand that the government wants to stabilise house prices, and fancies that making more mortgage finance available might do that. It is proof that not even the government believes its theory that the rate of new housebuilding determines house prices, for if it did believe that it would be delighted that not many houses will be built this year, and would be urging the cancellation of even more new build projects to stop the price fall.
Meanwhile over at the Bank of England they are less concerned that house prices are going down than that the prices of energy, food and other essentials are going up. They could take action to make more mortgage money available, by cutting interest rates to stimulate mortgage demand, but they fear that might lead to more money being borrowed to push up the prices of other things. The FSA could help stimulate the supply of mortgages by relaxing their requirements for the amount of capital a bank needs to sustain any given level of lending, but that too is unfashionable just after a period when banks lent too much without the capital backing the Regulator now thinks they need.
There is no evidence of any â€œjoined upâ€ thinking between government, Bank. FSA and the banking sector about what to do. The Bank and Treasury have lurched away from their view of last summer that banks had to sort themselves out, and it served them right if they had to rein back. They have not arrived at a new consensus on how loose or tight they now want monetary policy to be. There are some home truths the government needs to grasp before it makes more foolish statements about the mortgage market:
1. The mortgage market cannot be detached from other types of lending to people and companies. Many mortgages are advanced by banks who also lend for other purposes. Their ability to lend overall is constrained by the amount of capital they have and by the Regulatorsâ€™ rules on how much capital they need to have for any level of lending. If the government wishes to solve the mortgage famine it needs to solve the banking problem generally.
2. House prices are still high relative to incomes , following a period of massive credit expansion which the Treasury and Bank together encouraged by their low interest rate easy money policies of 2001-6. This was also fuelled by the Regulators effectively encouraging off balance sheet ways of financing mortgages. On the government’s analysis and view that houses are not “affordable” it might prove necessary for there to be a sharp fall in house prices before the market starts to function as the government wishes, as people are being squeezed generally so they cannot afford to trade up or to buy a first home at current prices.
3. Keeping interest rates up also prevents housing recovery. Banks look at how easy it is for someone to afford a mortgage on their income. A mortgage at 8% is twice as dear as one at 4%, and so is ruled out for many people on modest incomes.
4. The nationalised Northern Rock is damaging the mortgage market, as a major lender is unable to increase its mortgage book â€“ indeed it is having to run it down to repay government borrowings, and cannot compete strongly owing to Competition rules over state aids. Selling that bank on would help the market.
5. The government needs to accept that it cannot keep house prices up, stimulate more mortgage lending, cut inflation and place a windfall tax on the banks all at the same time. These different aims pull in different directions. Its first moves have to be to encourage the recapitalisation of the banks so they have the balance sheet strength to lend more â€“ the government itself needs to concentrate on finding a solution to Northern Rock, so that bank can lend more. Windfall taxes are incompatible with this aim. In the meantime it has to accept that houses prices on most forecasts will fall more this year and next. The sooner they do so, the sooner homes will appear more affordable. The authorities could cut interest rates to lessen the extent of the fall needed to price people back into mortgages and homes.
Current policy is incoherent. Interest rate policy is encouraging house price falls. Banking regulation is restraining new advances after a long period of allowing lending growth. Housebuilding and planning policy is trying to encourage further price falls. Attacking banks for being too careless in their lending as the Chancellor did last year encourages a more restrictive attitude towards lending.
What do the government want? Perhaps they should decide that first, then they have to bend every policy instrument to that aim. They never did answer my question about how far they think house prices need to fall to be “affordable”, yet they have gone on about how they are not affordable. Muddle over that is at the heart of their problem.