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Life after nationalisation

David Smith, economics editor of the Sunday Times, looks at the mortgage market as it enters a new era with a nationalised mortgage lender and uncertainty the name of the game

Writing about the economy and the housing market these days it almost seems that we need a new historical classification – ‘Before NR’ and ‘After NR’, dividing the era of Northern Rock being just an aggressive lender from the current one where every taxpayer has a vested interest in its future.

Perhaps we might even think of the two eras as ‘GB’ and ‘AD’, separating the time when Gordon Brown was chancellor and the housing market did not have a care in the world, from the so far stormy Alistair Darling period.

Momentous though nationalisation of the Rock was, I do not want to dwell on it for too long here. Politically, it appears to have played quite well, the government even gaining in the polls after the announcement.

Maybe nationalisation is no longer the dirty word it once was – I suspect a majority would favour renationalisation of the railways – or perhaps, as one poll showed, people accept that on this occasion the blame lay with the Rock’s management and the Financial Service Authority, rather than the politicians.

Ministers will be cautious, however, about bringing out the bunting – the government’s reputation also got a lift back in August and September when the credit crisis first broke.

There might even be a gain for Darling when it comes to the public finances. Before Northern Rock, there was a serious risk that the government would break its so-called sustainable investment rule of keeping public sector debt below 40% of gross domestic product. Now it certainly will, but can use the Rock’s debts as the excuse. When and if it is off the government’s balance sheet, either the public finances will have improved on their own, or the rule will have been long abandoned.

That’s enough Rock, for now at least. Where does all this leave the housing market? Nationalisation saw, if only by coincidence, the end of the 100%-plus mortgage. It saw, although we have known this for some time, not only the loss of an aggressive lender but the arrival of a bank, admittedly now state-owned, which is in the business of encouraging at least some of its borrowers to go elsewhere. There is, contrary to suggestions by some commentators, still healthy competition in the market. But at the margin, there is slightly less competition than there was.

Meanwhile, the debate is intensifying about the wider market outlook. On one side you have the roundheads, predicting a big fat zero for the change in house prices nationally this year. On the other, are the cavaliers predicting anything between a 5% and 10% fall in prices this year, probably with more to come next.

If they are right, then we should all be a little concerned. This was what prompted Kate Barker, the Bank of England monetary policy committee’s resident housing expert, to warn of some of these negative feedback effects in a recent speech. While her main view was of a prolonged period in which house prices rise by less than average earnings, there was, she said, a danger of something worse.

“If credit tightening were to prove more severe than in the MPC’s present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values,” she said. “The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation.” The pain, in other words, could last.

I am still proud to count myself a roundhead, although it is becoming a somewhat lonelier place to be. I also know you can rarely secure an outright victory on this one. If we roundheads are right and prices are essentially flat this year, the cavaliers will just push their falling-price forecasts on to next year and the process will repeat itself.

Beyond the inevitable heat that this debate generates, it is also clearly possible for reasonable people to come to different views. The other day, two reports landed on my desk, each from City economists looking at prospects for the UK housing market. One, from Robert Barrie at Credit Suisse First Boston, entitled Just the Housing Market Facts, looked at every indicator of price and activity, including Rightmove, the Home Builders’ Federation, the Royal Institution of Chartered Surveyors, Halifax, Nationwide and Hometrack. It concluded that “prices may fall a bit further in the next three to six months, but probably not dramatically”.

The other report, from Malcolm Barr at J P Morgan, took the same data but came to a much more downbeat conclusion. “The data look pretty bleak,” it said, and plugging them into the firm’s model suggested a 4% drop in prices in 2008. Barr, however, was inclined to be more pessimistic than that, predicting a 6% drop.

Take your choice. One important question is how the dynamics will exert themselves. Does a small slippage in prices, of the kind envisaged by Credit Suisse, lead to a bigger one because people start to anticipate larger falls and by their actions bring them about?

The answer, as always, will be in the data. I will certainly be watching it very closely.


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