Earlier this week, a TV company called me with a question. When it interviewed me about property prices a few weeks ago, I said that it was entirely possible that house prices would fall 60% before the current crash called it a day. Had I really meant it, and, if so, was I OK with the comment making it into the programme? I was. I don’t actually think prices will fall 60% – 40% would be more realistic – but given how far markets, and illiquid markets in particular, overshoot on both the way up and the way down it didn’t seem impossible at the time. After all, the auction houses were already saying that they see prices down not far off 30%.
The next day, the Bank of England cut interest rates from 4.5% to 3% making me wonder if I should think about being a bit more optimistic about things. But, however hard I try, I still can’t see how the rate cut will make things much better for the housing market. For starters, it doesn’t help most of those looking for a new mortgage.
Sure, anyone already with a tracker mortgage will do well out of it – it wipes around £125 a month off the cost of £100,000 borrowed via an interest-only tracker.
But in this environment the lucky holders of those mortgages are hardly going to celebrate this good news by rushing out to buy another house, are they? No, mostly they’ll just be pleased they can afford to fill the fridge for another month.
New buyers – the ones that really drive markets – are unlikely to get even that satisfaction. Several banks had already pulled their trackers off the market before the base rate cut and more have followed.
Nationwide stated that while it would be honouring the cut with regards to current tracker mortgage holders (as it is contractually obliged to do), it was withdrawing its trackers for new customers while it “takes stock of changing market conditions”.
This all makes perfect sense from the lenders’ point of view. There is much talk about how they must be forced to pass on the full cut of 1.5 percentage points, but it is hard for them to promise to do so when they don’t know if they are going to be getting the benefit of it themselves.
Mortgages aren’t priced directly from the Bank of England base rate, but as the Council of Mortgage Lenders has been patiently pointing out for the past year, from three-month Libor.
Libor used to track the Bank of England base rate pretty precisely, but post-credit crunch it no longer does: after last month’s cut it barely budged for several days and, although it has fallen sharply this week, it has not reflected the whole cut.
So base rates of 4.5% don’t mean mortgage rates at 4.5% and base rates at 3% don’t mean mortgage rates at 3%. Note that after base rates were cut to 4.5% in October, only around half of the nation’s lenders cut anything at all off their standard variable rates (SVRs) and practically none passed on the full cut.
The second thing to note is that regardless of what base rates are, if the banks don’t fancy lending they won’t lend – at any price. I was reminiscing with a colleague from my stock-broking days about how when we first arrived in Japan and found interest rates below 1%, we couldn’t understand why everyone didn’t buy houses. Only later did we see that cheap mortgages were only available to a few risk-free customers – middle-aged men of a certain status and income level. Everyone else was excluded from the market: if they wanted to borrow money, they had to do so via the consumer finance companies at 20%-plus.
Things aren’t quite that bad here yet but the banks are clearly more risk-averse than they have been for many years. The best deals on the market require deposits of 40 or 50% and anyone with a remotely iffy credit rating hasn’t a chance of getting even the worst deals.
So the point stands: if you can’t get a loan, what difference does it make that base rates are the lowest they have been since the 1950s? We endlessly hear, not least from Gordon Brown, about how there is massive “pent-up demand” for property in the UK. But this isn’t a concept that makes any sense in economic terms: demand isn’t demand unless it is backed by cash.
In my household, there is pent-up demand for a bottomless bottle of Ren rose bath oil, for a brand- new VW Jetta (diesel) and for a very bling yellow diamond necklace. But is this demand going to push up the prices of these items? Of course not. Not unless someone dumps a pile of money to splurge on our doorstep. Which they won’t. These days no one dumps money on anyone’s doorstep.
And that, combined with the miserable sentiment across the market, to say nothing of rising unemployment, is why, however low interest rates go, house prices aren’t going to stop falling.
• This article was first published in the Financial Times.