For this week’s biggest proposal for propping up the property market, forget Tuesday’s Pre-Budget Report. It was contained instead in a report commissioned by the Government and written by Sir James Crosby, the former head of HBOS. This recommends, says The Guardian’s Jill Treanor, that the Government kick-starts the property market by guaranteeing “the moribund market for mortgage-backed securities” using £100bn of taxpayers’ money.
That’s (yet another) eye-watering number, but will the scheme work? No one disputes that the property market is on its knees. Net mortgage lending has more than halved this year, and could even fall to zero in 2009 if people start paying off loans faster than they are being granted. And sure, part of the problem is banks are finding it tough to raise money by selling mortgage-backed bonds that other banks won’t touch. In theory, therefore, a Government seal on mortgage-backed securities might get banks lending to each other, and us, again. As Paragon CEO Nigel Terrington tells the Daily Mail, “Before the credit crunch, 80% of net lending was coming from capital markets”, so it is “absolutely fundamental to get this market going… for the mortgage industry in the UK as a whole”.
Fine, but the scheme won’t solve a more fundamental problem, and indeed it shouldn’t even try. In short, why would anyone want to borrow huge amounts, even if they could, to buy a falling asset? House prices have already dropped 15% from their peak in late 2007, according to the Halifax, with Global Insight forecasting a further 15% drop in 2009.
And that’s because at 2007 prices, houses were a total rip-off. No-one in the Government worried about prices overshooting wildly on the upside, so it seems perverse to risk £100bn of taxpayers’ money in a futile attempt to stop them “overshooting on the downside”.
Next, we had Alistair Darling’s proposals. Tuesday’s report contained a few pretty tame measures for homeowners. These include a three-month grace period before lenders can repossess, a continuation of stamp duty relief for properties worth less than £175,000, and an extension of a scheme that provides capped mortgage interest relief for homeowners who lose their jobs. Darling probably didn’t go further because he can’t afford to. Good – prices must drop further and they will.
A week in the property market
• Global house prices have fallen for the first time on record. Over the last three months prices all around the world have dropped, according to Knight Frank. Britain was among the worst performers, with house prices dropping 4.6% over the quarter. Meanwhile, in Latvia (pictured below), prices fell 6.2%, in Norway 4.5%, and in Canada 4.9%. Indeed, average prices across the world fell by 0.3% in the third quarter, causing the annual price growth to slow to 3.8%. As for the worst annual price fall, that dubious honour goes to Latvia, where prices are down 24.1% over the year.
Some countries are still experiencing growth with prices up 31.2% in Slovakia, 26.9% in Russia and 26.8% in Bulgaria, but even in these countries growth has slowed sharply. “It is now clear that no part of the world is likely to escape the credit crunch as property prices start to fall in more and more parts of the globe,” says Nicholas Barnes, head of international research at Knight Frank in The Guardian.
• Asking prices in London have fallen steeply in the past two weeks, according to the Evening Standard. Vendors have knocked an average of £28,796 off asking prices in an attempt to secure a sale before Christmas.
• Mortgage approvals fell in October to 21, 584 from 23,383 in September, according to the British Bankers’ Association. That’s a drop of two thirds from July 2007’s peak and only a slight increase on August’s record low figure of 21,363. Howard Archer of HIS Global Insight described the latest figures as “extremely weak, maintaining the dire news on the housing market”.