SOMETHING extraordinary is happening in the housing market. We are seeing an
unprecedented collapse in mortgage lending and no sign of an official or
private-sector response.
Housebuilders are hurting badly, as are others that rely on a thriving housing
market for their livelihoods. Nobody, however, seems prepared to do much
about it.
This week we will get figures from Nationwide and it will be a surprise if
they do not show an eighth consecutive monthly fall in prices - and a big
one. May’s drop was a scary 2.5%.
I have been puzzling about why Nationwide and Halifax surveys have been
showing such sharp price drops, at least as bad as at the corresponding
stage of the early 1990s slump, when economic conditions are more favourable
today.
Lenders are taking a more aggressive approach to cutting valuations on which
they are prepared to lend. That, though, reflects only part of the weakness.
The real story is that the credit crunch is indiscriminate in its impact. In
the early 1990s, peak-to-trough price falls on the lenders’ national price
measures were not that large, given how devastating the crash was. The
Halifax index fell 13%, the Nationwide 20%.
Many people remember rather bigger falls than that and are right to do so.
What we had was a “normal” price correction, beginning in London, southeast
England and East Anglia and spreading to the rest of the country. The effect
of this ripple pattern was to limit the drop in the national measures at any
one time. In 1990, for example, the Halifax index showed no change. Prices
fell 12% in East Anglia, though, while rising 13.6% in the north.
This time all regions are suffering together. So sudden is the downturn that
few parts of the country are immune. The ripple pattern has been compressed.
We can see the sudden nature of the adjustment in figures for new mortgages.
Last week the British Bankers’ Association (BBA) reported real shockers,
with new-mortgage approvals of only 27,968 last month, 20% down on April and
56% down on May 2007.
Again, this did not happen in the early 1990s. The kind of collapse in lending
we have seen over the past 12 months took four years then; there was a 57%
drop between 1988 and 1992.
It is important to recognise that the credit crunch is the driver of this
downturn. This is not an implosion of the housing market under the weight of
its own overvaluation. It is not a wave of forced selling by homeowners who
got in over their heads. It is not a sudden and unanticipated collapse of
demand. It is not a rush for the exits by buy-to-let landlords.
All these things may yet happen, but the cause is clear: a sudden and sharp
drop in mortgage availability, combined with a rise in their price. Can
anything be done? Should anything be done?
The extent of the crunch can be seen clearly in the numbers. The Council of
Mortgage Lenders (CML) expects gross mortgage lending of £285 billion and
net lending of £55 billion this year - half 2007’s £108 billion.
About 40% of the stock of UK mortgages is funded not by customer deposits but
by wholesale funding - senior debt, mortgage-backed securities and covered
bonds. This time last year 60%-70% of new lending was funded in wholesale
markets. When those markets closed last summer, lenders were stuck, Northern
Rock particularly so. When they stayed closed, the result was a mortgage
famine of a kind we have never seen before.
BBA numbers show how this is biting. Existing borrowers are not doing badly.
Remortgages - moving the same amount to a new lender - totalled 63,303.
Equity-withdrawal mortgages, when people change lender and borrow more, were
28,766, against fewer than 28,000 new mortgages. So there were more
equity-withdrawal mortgages than new ones. First-time buyers are becoming
extinct. Who is responding?
The Bank of England’s special liquidity scheme, launched in April, may have
played its part in keeping the banking system afloat, but has had zero
impact on the mortgage market. Also in April, Alistair Darling announced
that he had appointed Sir James Crosby, former chief executive of HBOS, to
head a working group to report on possible remedies for the malfunctioning
mortgage market.
I am not blaming Crosby, but Treasury wheels grind exceedingly slow. His
interim report is not expected until late next month, nearly a year after
the credit crisis broke, and his final report will not be until autumn.
Caroline Flint, housing minister, told the Chartered Institute of Housing
annual conference that officials were pulling out all stops in search of a
solution, but evidence of that activity is hard to see.
The CML has been talking to the government about a plan to revive wholesale
funding markets but is coy on the details. It says there is a solution that
would not involve a transfer of risk to taxpayers. Part of it may be the
Bank taking new mortgages, as opposed to pre2008 loans, on to its books as
collateral.
The New Local Government Network has called for something outlined here a few
weeks ago - that the government, through local authorities, should get back
into the mortgage market, as was the case until the early 1980s. Even with a
big budget deficit, the government does not face serious funding
constraints. When things improve, those mortgages could always be sold on to
the lenders.
If there are fixes out there, somebody in government should be putting them
into practice. As it is, there is an overwhelming sense of inaction.
Why, you might say, should the government do anything? Those who lived by the
housing market should also die by it.
Nobody, however, benefits from a disorderly correction, or a malfunctioning
mortgage market. First-time buyers are worse off than they were before. The
housebuilding industry is suffering a downturn from which it could take
years to recover. A government that prided itself on stability now risks
presiding over extreme instability.
Steve Nickell, head of the government’s National Housing and Planning Advice
Unit, believes that current developments will exacerbate medium and
long-term housing shortages. Prices may be falling now but the long-term
trend is “relentlessly upwards”, he said in introducing a new report last
week. If the market overshoots down now, it will overshoot up again next
time. It is hard to see that is in anybody’s interest.
PS: Tough though it is for housebuilding, not all builders are struggling. Ian
King, The Sun’s business editor, tells me you can’t move for scaffolding in
his part of London. I can report my skip index is alive and well. This is
not just anecdote. The Federation of Master Builders says some members have
switched from new developments to loft conversions and other private work. A
GE Money survey uncovered something similar.
What’s going on? It may be a bit of “can’t move, will spend”, where people
decide a house move is not worth contemplating now, so why not improve? For
the cost of moving, in particular stamp duty, you could build a decent
extension.
Though official retail sales numbers for May were taken with a pinch of salt,
the CBI’s latest distributive trades survey, described as “another difficult
month for the high street”, was better than April or May. Consumer credit is
easier to obtain than mortgage finance. Retailers are rolling out summer
sales, but no earlier than normal.
The great debate was about whether the housing downturn would leave consumer
spending unaffected or push it lower. What we didn’t expect was weak housing
associated with stronger spending elsewhere. It may not last - the Bank
would be alarmed if it did - but for now we should treat tales of extreme
woe from the high street with care.
Smith should be ashamed. Plenty of people saw this "debt" issue coming. The fact that it came in the form of the credit crunch doesn't hide the basic fact that people overloaded on cheap credit. To then suggest that the govt bail out the housing industry is farcical. And FTBs are way better off now!
Toby, London, UK
Drivel. Declare your property and investment interests.
Matthew Brook, DORCHESTER, United Kingdom
I can be hard to admit when you've just been suckered by (yet another) bubble. But that looks like what's happened here.
David, Bradford, UK
I left the uk housing market last summer because I feared a downturn. I am now living in the south of France enjoying the sunshine. I have bought a property as big as my whole street in London for less than haff the money. I am earning the same amount of money as in I was in London. I am a builder.
John Moore, Gaudonville, France
Maybes one of your better articles, the reality of the real world is somehow coming home to you, I live in europe getting credit or a loan is impossible. the pro-USA lobby won the day because of the city's short termism, why dont you vote for G Soros for CE, The euro will soon be level with sterling
brutus, Leasonville, Singapore
This article is spot on. Notice the same old names leaving their ridiculous comments - it would help if you read the article again and understand why house price falls are bad.
phil, harrogate,
What a heap of rubbish! As Jon from London said, it’s a turning of the credit cycle, it will clean out the overleveraged. The credit crunch will sniff out the weak positions and won’t stop until its done, it is not indiscriminate, if you have taken on too much risk its coming to get you!
Jocko, Zurich,
The so-called 'credit crunch' is exactly the medicine that this country needs. A further tightening of the 'loan stranglehold' is only the start on the road to paying off all that debt. If you cannot remortgage, tough, you shouldn't have withdrawn equity or borrowed so much in the first place.
Paul, Coventry,
Really this is a dumb article. No government, "not even a Labour government" can abolish cycles, so don’t try
Howard Banham, London,
"government using CPO to buy land cheaply & then limit prices"
What about the free economy? If prices drop by 50% only someone who is stupid would not assume more FTB's would be able to enter the market at a quicker rate rather than waiting and saving harder to stump up 50% more deposit. Basics!!!
Paul, London, Canada
Plenty of opinions, shame they miss the salient points. Price reductions of 50% won't make most houses affordable for FTB's so stop living in dreamland! The only way to solve the problem is to build more FTB houses (not flats) with the government using CPO to buy land cheaply & then limit prices.
Iain D, Blackburn, Lancashire
You claim that first time buyers are worse off. I would disagree. I am 27, and currently sitting on 35K saved deposit. Its getting bigger by 2K every month. I didnt go begging to my parents either, thats all my own money. Why dont people save any more?
Sam Smith, Southport, Uk
In this game we have many players of which one always seems to be wining, guess who…BANKS. One thing is clear though.. if the BANKs are asking for a 15% deposit, that is precisely how much house prices can potential fall. This guys have the analysts, the insiders and 100s of years of experience
Peter , Lodon, UK
And I quote ...
"It is important to recognise that the credit crunch is the driver of this downturn. This is not an implosion of the housing market under the weight of its own overvaluation."
Actually, that is one and the same thing.
Mary Jones, Brightlingsea,
The fact that the CML is looking for ways to re-inflate the housing bubble by trying to stuff a few more suckers in at the bottom of this pyramid game is reprehensible. Why would anyone want to buy now that property values are plunging ? The CML should be abolished for crimes against the borrower.
Justin Thyme, Bangkok, Thailand
DS really can't see the wood for the trees. Lending requirements even now are hardly draconian (a deposit and 6% interest rate is hardly outlandish historically). Apply these standards to the price of an average house and the average joe can't afford it - houses are overpriced. QED
j barrows, newcastle,
Rubbish. Inflated prices have had an influence.
As a six figure salary earner, I am unprepared to return to the UK and buy a rabbit hutch at an extortionate price.
Until they drop I will continue living overseas, in property half the price than UK, with more space and a higher standard of living
Gareth Jones, Dusseldorf, Germany
David,
I know you find it hard to accept but please, please wake up to the reality that house prices are massively overvalued, driven by a speculative boom based on cheap credit. That era is well and truly over. First time buyers and 'up-traders' will benefit massively from the coming fall
Grafton, London,
Boo!Hoo!hoo!
Why doesn't somebody DO something!
Carol Coulston, Bournemouth, Dorset
so your solution to the problem is for govt to lend billions on overpriced homes, and then be saddled with huge losses.
We've already let the bankers off the hook, now you want to do the same to irresponsible home owners?
This route leads to madness. Are you really that naive?
Russ, High Wycombe, England
This is a ridiculous article. Housing not over-valued? It clearly is by any measure. Lax lending practices by the banks and building societies created fat profits for themselves whilst enslaving the population of this country to ever higher levels of debt. It could never go on for ever...
Simon, London,
'It is not a wave of forced selling by homeowners...'
Yet!! Just wait until those credit cards are used to the max and see the imposion that follows. A savings rate of 1.1% for May is the lowest since 1959. You're like a politician - inflation (3.3% a month?) is hurting like hell.
Rob, isle of Wight,
David ... last thing we need in the uk at present is more credit!....we are inundated at my advice centre with ordinary folks owing thousands with no hope of repaying! debt problems are out of control!
Hopefully the restricted credit is what was needed years ago ie: credit control!!
John, Somerset
john , taunton, uk
And what caused the credit crunch, David Smith? If it hadn't been US subprime, it would have been somewhere else in this madly leveraged environment. This is a credit cycle turning. Enough of this nonsense about: 'if only more credit were available'. That's the whole point!
Jon, London,
The credit crunch will last for at least another 2 years and will be fueled by falling house prices. Banks will keep interest rates high as they repair balance sheets and the BoE will need to raise Base Rates to stop sterling falling and causing inflation. By 2011 prices will be down at least 35%
Mike Livingstone, Reigate, UK
We live in a market economy and should not consider government intervention in the provision of finance. If the government has money to spare please use it for something that benefits everybody by improving dire hospitals or saving village post offices.
Steve Duncan, London, Great Britain
Houising as everybody knows is massively over valued! First time buyers cannot afford to get on the housing lader even though mortgage rates are around thier long term average.
Yes its going to be a painful correction, however the real pain is not now, it when wage inflation builds and rates rise
Mark, Plymouth,
The UK has run up too much debt (record for a G7 country).
The markets have sobered up, and now we have to work through life after peak debt.
Please try and come up with something other than "lets get the debt going again, it felt nice"
How about re-start manufacturing, or reduce public spend?
Mike, Tauranga, New Zealand
agree with John Smith - what is so great about making the next generation take out huge mortgages which will be a burden to them for 25-30 years to add even more money to the overbloated equity of the previous generation who were lucky enough to buy when it was cheap - shame on you!
Mel, London,
Remove your head from the clouds, and realise that houses are MASSIVELY overpriced! I know many people who are earning a good wage, and will NEVER be able to afford houses at their current prices.
This is the most indebted country in World History (ONS stats). Debt is not the answer!
David Brennan, London, UK
"This is not an implosion of the housing market under the weight of its own overvaluation."
Yes it is - look up the OECD price-to-rent and price-to-income ratios. For 2007, the UK figures were 172 and 150 respectively compared to a long term average of 100.
John Jenkins, York,
Commentators having being saying for ages that the increase in property prices could not continue. Yet the correction, which was sorely needed to bring first time buyers back in, is now seen as disastrous.
Would you rather have a short sharp decrease, or 2-3 years of continuing pain?
Grant, Camberley, UK
If carrots cost a million pounds each, nobody would buy them.
Why then would first time buyers buy one million pound houses?
Half million pound carrots, though sound much more appetising.
Yum, yum first time buyers, just wait and enjoy the crunch.
sisan leigh, salford, england
If Mr Smith had been around in the early eleventh century he would no doubt have been one of those urging King Canute to turn the tide. Like those courtiers, he should get over it; realise that the tide does change periodically and learn to live with it rather than trying to defy it.
Scary, Windsor, UK
"Nobody, however, benefits from a disorderly correction, or a malfunctioning mortgage market. First-time buyers are worse off than they were before."
More crocodile tears for first-time buyers? First-time buyers will benefit handsomely by waiting for prices to drop as they must.
qg, South West,
Divide 25 by 6. It equals 0.24. If a buyer takes a six times earnings mortgage over 25 years (last year, this was possible), 24% of that buyer's GROSS income is needed for the repayment alone. Add interest, and that roughly doubles. Do the math David - the market will correct by at least 50%.
John, London, UK
David,
Why do you treat the fact that FTBs will need less money to buy our houses as bad news? In fact that is great news!
People have delayed downsizing decisions because of a "bubble mentality"... "if I wait longer I will be better off financially"... now properties are flooding the market!
Geoff Ruud-St-John, Torquay,
For god's sake don't encourage this or any other government to step in where the market fears to tread with another hair-brained taxpayer funded bailout for the feckless. Houses are overvalued - prices need to fall - we have too much debt and not enough savings - tax the landbanks not the people.
Huw Sayer, Norwich, England
But still house prices in North London are not falling. In fact asking prices seem to be rising.
DS should be campaigning for people to slash prices, so the market can naturally reset, rather than looking for a new wave of liquidity to reinflate the bubble. Most still believe prices only ever rise
Davie P, London,
At last a voice of reason!
Tony W., London, UK
Interestingly he didn't cry for help when there was an 'easy credit', when everyone could get a 100% mortgage, when national TV showing you how to flip houses and be rich.
The tide has turned. It's simple. This worldwide housing bubble was caused by 'easy credit' and this bubble is now burst with CREDIT CRUNCH!
What goes up must come down! I guess David Smiths didn't expect UK house prices would fall and never thought of the reason behind: Hard to find a mortgage.
I always believe in CYCLE. When the time is up, there will be a reason(you never thought of) to crash the market.
aileen, Toronto, Canada
Property prices have fallen but interest rates have risen. Payments much higher and rising!. Banks are demanding larger deposits and much lower income multiples to qualify. Mortgage rates are now much higher than official bank rate?? First time buyers rarely qualify for mortgages worse than before.
Micad, Chelsea, UK
I have no idea why you think that first time buyers are worse off now because they cannot borrow as much as before ? The result will be that prices will come down and they will (as a group) get the same properties for less money. That is not worse off.
Tristram Shandy, London, UK
The long property boom has created an insane environment.
Reality - their are millions of homeowners who have delayed downsizing for the past five years they are now flooding the market. Reality most people with any prospect of repaying a £200k mortgage have jumped onto the bandwagon already.
Mark, Epping, Essex
"What we didn't expect was weak housing...."
David. you never expect anything bad. That is your endearing quality.
anthony, london, england
Banks are lending less money because they know that house prices will fall. People will borrow less because they can't afford the cost of living and there's no guarantee of profit due house price inflation. I don't see why you want to intervene. Is the UK economy solely based on the housing market?
Ahmad, Tunbridge Wells, UK
Criminal! You seem to WANT people to pay as much as possible to bankers in debt interest and capital repayments. It is in everyone's interests for house to be as cheap as possible except of course the banks, and your employer. Why didn't you argue against price rises getting out of hand 5 years ago?
John Smith, manchester, UK
The cause of the house price bubble was too much easy money. Now that the era of easy money is over there's going to be a severe crash and recession. UK household debt is the highest in history. There's nothing puzzling about this to anyone with any sense. Your predictions were wrong Dave Smith.
JImmy Mac, London, UK
First time buyers have deserted the housing market because lending restrictions have been tightened. A minimum of 5% desposit is required by most lenders, and since many people are mired in debt they simply to not have the funds. Allowing mortgages of 125% caused the boom. Now we have the bust!
sophie smith, london, uk