It’s different this time

12 August 2008

This property downturn is probably different from any other in living memory, or perhaps ever.

In the recent past it has been economic turmoil that has caused inflation, rising interest rates, increasing unemployment or economic recession, leading to falls in people’s real incomes that has driven economic ills.

It is one or more in combination of the above that has driven the increase in missed payments, rises in defaults, increasing possessions and then a fall in house prices.

I call this a personal profit and loss issue.

Due to the old Mr Micawber problem of expenditure exceeding income, it has started a rocky road for some people.

This time however it is a Balance Sheet problem. Most consumers could afford what they had.

But due to lenders changing their view of the situation then some consumers are being forced out of the market or into economic strife.

As LTVs are reduced and lenders tighten their scorecards, people are squeezed not purely on their affordability, but down the risk ladder to higher interest rates and consequently higher repayments.

This squeeze is a self-fulfilling game where those considered a risk become the risk that is feared.

The crisis is as much one of confidence than driven by any particular piece of data.

Arrears and possession volumes are far from the early nineties levels, but property values are tumbling.

Lenders are spooked and have limited access to capital for new or renewal borrowers.

In the same way that our inflationary problems are unusual, but not unique.

For many decades we have been haunted by the spectre of demand led inflation, caused by slack money supply, rapid economic growth, or increasing velocity of money flow, meaning too much money chasing too few goods.

Whilst RPI measured the cost of a mortgage not the cost of property, the escalating malaise of hidden inflation driven by the capital cost of property was ignored.

But now we have supply led inflation. Oil and food costs, due to supply constraints, have leapt.

The tools at the disposal of the MPC do not have the scope to deal with this quickly or effectively. Other components of the economic mix have more chance of being effective medicine.

Government expenditure, taxation changes involving the individual, VAT and corporation tax; or trade barriers are all components that could be tweaked to impact.

So our current Treasury is dusting off files from the first half of the last Century to learn how to apply economic first aid.

So a Government struggling with issues that are "new" in their memory is now in recess.

The Westminster world has embarked on annual leave, leaving the problem for an answer in the Autumn.

Speculation on solutions like Stamp Duty holidays and HIP replacement puts the market into further decline. It all runs the risk of being too little, far too late. The right answer to the wrong question.

As the medicine to be applied may take longer to be effective, such delay risks many of the population losing their houses through lack of action.

This lack of a balanced view on the risks on a property and peoples ability to pay is an issue.

It impacts equally on the borrower and the lender.

It damages the individual, both now and for their future ability to borrow.

It damages the lender, as it invariably leads to a write-off of debt and damages their balance sheet.

Step one is that if an individual maintains their mortgage payments at their "old level" then the lender should capitalise and not penalise the difference.

We should encourage individuals to take advice and lenders to be as supportive as they can be.

Here at AFB we have other remedies and we strongly support the work of the CML in how to repair mortgage capital markets

But it takes leaders with vision and values to make such work.

The question for our current administration is who is the leader who cares enough about people's today issues, to step away from the party line?