When it comes to wealth, there’s a link between the feel-good factor and consumer demand – when house prices and stock markets are rising people feel more confident and head for the shops with their credit cards, fuelling demand that boosts the wider economy.
Similarly, many of us feel less wealthy if we experience a bear market in equities or a fall in house prices. World stock markets have recently resembled Ossie Ardiles’ knees – they have gone all wobbly.
Strangely, it is neither the threat of a global rise in interest rates nor the threat of inflation that has caused this. Rather, markets worldwide have showed stress because of uncertainty over the pricing of commodities. Risky assets, whether shares, whole markets or credit instruments traded between banks, have all been heavily sold.
Any selling after a long bull run triggers unease. This is especially true when signs of weakness are emerging in the world’s financial heart, the US. Over there, the housing market is slowing considerably. Recent defaults in the sub-prime mortgage market have given pundits a lot of cause for concern.
The share prices of some of the lenders involved have been savaged. Recently, the New Century Financial Group, the second largest sub-prime lender in the country, saw its share price fall 36% in a single day. Shares in Novastar Financial, a top 20 US lender, fell 42.5%.
If this market was to spectacularly implode it could send a shock wave through world markets that would have significant consequences for investors and the housing market. Another worry stateside is that big firms are posting less than impressive figures.
The big fear is that investors have failed to factor in a slowdown and have been busy using cheap money to invest in high-risk, high-return assets. Should they now decide to batten down the hatches a wide range of asset classes would be hit and the UK mortgage market may not remain immune.
To date, there has been no rush by institutions such as pension funds to sell shares. Panic selling by these investors would signal that this latest wobble is something more than a correction. Such a scenario could affect the pricing of mortgages and borrowing.
We are a long way off this scenario and I would be surprised if such a crash happened in the near future, if ever. However, it would be wise to keep an eye on the warning signs. The British Bankers’ Association has said that credit card lending in the UK declined by £496m in January. This followed a decline of £329m in December. The January figure is the biggest contraction since figures were first published by the BBA in 1993.
This reduction in credit card lending came about as a result of tighter credit controls by banks and increased awareness among consumers in the wake of a series of base rate increases.
The public is easily panicked and central bankers need to tread a clever path to prevent a run on shares that could be felt in the UK mortgage sector.