John Varley’s caused a bit of a rumpus this morning.
The chief executive of Barclays has apparently told The Telegraph’s Jeff Randall that Britain’s house price crash is only about halfway through. Not only that, but he reckons prices could fall, from peak to trough by “something like 25-30%.”
It’s unusual, says The Telegraph, for someone in such “a sensitive position” to make a prediction about house prices. Some housing pundits reckon it could put people off making plans to buy.
I’d have thought they’d be grateful. After all, if anything, Mr Varley’s being optimistic…
Falling house prices show no sign of slowing
John Varley’s prediction that house prices could fall by as much as 30% in total might be unusually frank for a bank chief executive.
But it’s hardly the gloomiest prediction out there. In fact, it’s pretty mainstream now. For one thing, house prices are already down nearly 15% by Halifax and Nationwide figures. As yet, they show no sign of slowing. So anyone thinking we can get away with anything less than about a third off peak prices is hopelessly optimistic.
Also, if things pan out as Mr Varley seems to suggest, it wouldn’t be that bad. He says “I suspect we’re about halfway through… so in other words, we’ve got another 10-15% to fall between now and the end of next year.”
But if house prices were bottoming by the end of next year, this would have been one very short house price crash. And somehow, I don’t think that’s likely.
Banks were taken in by the house price bubble just as much as householders
Regardless of what the Bank of England does with interest rates, banks are no longer keen to lend against housing. Why’s that? Simple – because house prices aren’t rising any more.
Back in the good old days, banks were taken in by the house price bubble just as much as the average householder. They fought each other for market share by slashing profit margins to the bare minimum, and creating ever-riskier products.
Mr Varley now says that this was all “madness,” referring to the 125% loan mortgage products among others. But that’s not what people were saying at the time. It was a brave new world. Supply and demand for homes on this overcrowded little island meant that the number of people clamouring for property would always far outweigh the sellers. You couldn’t go wrong with bricks and mortar.
And if that’s the over-riding assumption, then actually, a 125% loan isn’t really ‘madness’ at all. If you assume and believe that property prices will keep rising at double-digit rates, then it won’t be long before that 125% loan has shrunk to a 100% loan, compared to the value of the house. So if house prices are rising, then who needs to ask for a deposit? The equity will build up very rapidly, even without any money being put down.
That means you don’t need to worry as much about the creditworthiness of the borrower. After all, if they fail to pay you back, you can just take possession, and the rise in prices will more than cover your costs. It’s a no-brainer – as long as you accepted the flawed assumption that house prices would always rise in the first place.
We won’t be out of the woods within a year
Of course, that wasn’t the case. As we’ve always said, it turned out that the most important supply and demand variable for the British housing market was the supply and demand of credit, not of property. And that’s why it’s going to take a long time for prices to recover, or even to bottom out. Because banks won’t be keen to lend any time soon.
Just as you can ignore risk if you believe prices will keep rising, you become very aware of it if you’re lending against a collapsing asset. So now banks are asking for very hefty deposits indeed – if you want the best deals out there, you’d better be able to stump up 40% equity.
And as Sharlene Goff and Elaine Moore reported in the FT at the weekend, it’s no longer just about the price of deals or the size of deposit you need. Lenders are becoming much more picky about their criteria – almost looking for excuses not to lend, some might say. “Mortgage brokers have cited examples of borrowers being refused a mortgage because they had paid a mobile phone bill a few days late, or because they had opened a number of different savings accounts, which had triggered multiple credit searches from banks.”
With the banks still struggling – HBOS’s further writedowns on Friday showed that there’s still plenty of bad news out there – they’ll maintain their reluctance to lend. And with the threat of further recapitalisations, it could take a very long time to repair balance sheets. The idea that we’ll be starting to come out of the woods in a year’s time is sadly, likely too optimistic.
In fact, MoneyWeek regular, James Ferguson, recently told readers of his Model Investor newsletter that he expects “house prices to halve and take nigh on a decade doing it.” As he points out, after the 1990s bust, residential property “fell in value every year from 1990 to 1996, even though rates were cut each and every year.”
Our recommended article for today…
How the US banking bailout became a buying spree
– American banks are taking advantage of the US Treasury’s $700bn Troubled Asset Relief Program. But they’re not using the money to increase lending – they’re using it to buy up other banks.