Anyone still clinging to the notion that the latest slump in house price growth was just a ‘blip’, like the 2004/05 slowdown, would have had their faith badly shaken in the past few days.
Nationwide building society reported last week that annual house price growth fell to just 1.1%. The group warned that it expects house prices to fall this year.
That was just the start of it. Recent moves by banks and building societies to pull good mortgage deals off the market as rapidly as they can, have catapulted the credit crunch into the evening news.
What was a fairly obscure financial crisis is now making itself felt in the everyday lives of the man and woman in the street. For a large chunk of the population, house prices have been a barometer to measure both their personal wealth, and the health of the economy at large.
Sadly, they’re about to find out that much of that wealth – and the apparent health of the UK – were entirely illusory…
No more good mortgage deals
The UK housing market is undeniably in a bad way. In less than a year, annual average house price growth has practically flat-lined. The lastest house price survey from Hometrack found that house prices fell for the sixth month in a row in March, down 0.2% during the month, to an average of £174,100. That’s a fall of £2,200 since the summer.
It’s becoming very clear that, despite constant protestations about “our over-crowded island”, and a lack of housing supply, the real driver of soaring prices was out-of-control lending.
After all, we haven’t seen a massive construction boom in the past nine months. What we have seen is a collapse in the availability of funds for buying property. It’s old news now, but to recap briefly, banks have realised they’ve been too careless about who they lend to, and what they’ve been investing in, in recent years. Now they are worried about their own solvency, and the solvency of their fellow banks. If you’re worried about someone’s creditworthiness, you demand stricter terms when you lend to them. That’s what’s happened to the banks. And as their cost of borrowing goes up, they then have to raise the cost of borrowing in turn for consumers.
In the past week or so alone, says The Telegraph, the interest rate on the average two-year fixed mortgage deal has risen to 6.29% from 6.15%. And it’s rising all the time. Cheltenham & Gloucester last week replaced its 6.23% lifetime tracker rate with a 6.53% deal. But just 24 hours later it had pulled the deal entirely, saying that it had been swamped with applications.
As Melanie Bien of Savills told the newspaper: “There are simply too many borrowers chasing too few deals.” Overall, the number of mortgages available out there has fallen from about 15,000 to around 5,500 since last summer. That’s a staggering collapse, and more than explains why the number of sales is going through the floor – buyers simply can’t get the funding.
This is only the first stage. As those who are already homeowners come to the end of various deals taken out pre-credit crunch, they’ll find getting decent replacement deals much harder, and much more expensive. Some of them won’t be able to afford the extra costs, and will end up having their homes repossessed, or selling at what price they can achieve. Quite apart from the massive human cost involved, rising repossessions will hammer prices even harder.
How bad could things get? Ed Stansfield at Capital Economics (who have been long-term bears on the UK property market) reckons that a fall of 25% by mid-2010 is “entirely plausible”. Economist and stockbroker for Pali and regular MoneyWeek contributor James Ferguson, believes that from peak to trough, the falls could be even worse. You can read James’s predictions for the housing market in this piece originally published just before Christmas: Here comes the house price crash.
The best way to prevent a future financial crisis
By the way, as I mentioned last week, amid the outcry for more banking regulation and general revulsion at these irresponsible ‘fat cats’, we must not forget that this was only made possible by central banks setting interest rates too low. As Roger Bootle puts it, “rampant lending was not an accident. It was a direct result of a deliberate policy of boosting domestic demand via low interest rates”.
It was this interference from the authorities which encouraged the mispricing of risk. If the false hope of central bank bail-outs had never existed, then bankers would have been a lot more careful about who they gave money to. Perhaps rather than more regulation, what we need to is to allow the market to set interest rates, free from central bank distortions. After all, as the Bank of England has found, that’s pretty much what’s happening now.
Turning to the wider markets…
In London, the FTSE 100 fell 24 points to end Friday at 5,692, down from an intraday high of 5,747. Housebuilder Persimmon was the biggest faller.
Across the Channel, the Paris CAC-40 fell 23 points to end the day at 4,695. And in Frankfurt, the DAX-30 closed 18 points lower, at 6,559.
On Wall Street, stocks fell for the third day in a row. The Dow Jones fell 86 points to end the day at 12,216. The broader S&P 500 was down 10 points, at 1,315. And the tech-heavy Nasdaq slumped 19 points to close at 2,261.
In Asia, stocks slid amid concerns that the US economy is weakening further. The Japanese Nikkei was 294 points lower, at 12,525.
Crude oil had fallen back to $105.16 this morning and Brent spot was down by over a dollar, at $103.52.
Spot gold was little changed this morning, trading at around $940 an ounce. Platinum, meanwhile, headed higher to $2,046, while silver was trading at $17.98.
Turning to forex, sterling fell to 1.9858 against the dollar and hit an all-time low against the euro before edging up to 1.2565. The dollar was last trading at 0.6328 against the euro and 99.27 against the Japanese yen.
And in London this morning, a survey of the financial sector from the CBI shows that UK banks expect the problems in the credit market to last until at least the end of the year, twice as long as they had forecast just three months ago. Banks expect lending conditions to continue to worsen over the next six months.
Our recommended articles for today…
The world food market – it doesn’t make sense
Gulf states are planning to use desalinated water to grow wheat, whilst the US is already using corn to make biofuel – does this really make sense? If such misallocation of resources continues, food prices are going to cause mass hunger and civil unrest worldwide. To find out what this means for your investments, read: The world food market – it doesn’t make sense
Three sectors to buy – and three to avoid
At the start of this year, MoneyWeek picked the sectors to buy into – plus the most attractive stocks in each – and those to avoid. The article is now available to non-subscribers, so to find out why you should be buying GM food and getting into debt, read: Three sectors to buy – and three to avoid