Newsletter 4
Main Story – Market Update
"I can guarantee to you that I can count" (Nick Leeson, Barings Bank - formerly)
In the Spring newsletter we said that the situation in the financial markets would not improve until banks came clean about their losses. Chickens are certainly now coming home to roost.
In this section, we hear from the views of the RBS Chief Economist on recent events in the financial sector and from the Association of Mortgage Intermediaries on the Government's housing proposals. We also look at how these events are affecting the mortgage market.
James Carter, Principal at Independent James
It was September 2007 when we saw the queues start outside Northern Rock branches and effectively, the start of the credit crunch and its effects being felt by the Financial Services industry in particular. This has had a time lagged effect on house prices which are feeding through in to the real economy now with year on year falls.
On the basis that an average recession lasts around two years, we would now have a year left of tightened liquidity conditions, followed by house price falls and a recession lasting until 2010.
With the severity of recent news, we can just hope that this is ‘only’ an average recession.
There has been a huge amount of Government intervention in the financial markets in recent weeks. Several huge institutions have effectively been nationalized on both sides of the pond - but particularly in the US. I do honestly believe that the UK is better positioned to come out of the downturn. Whilst much criticism has been leveled at UK regulators, it appears that they are geniuses compared to those in the US.
I must also add however, that mortgage finance is still available. If you have a reasonable level of equity and income, then there are still opportunities to improve your existing rate (dependent on circumstances). The main problem that I see is on the purchase side and is one of confidence. 5 years ago people bought a property with full expectation of a double digit annual increase in their investment, which is no longer the case.
Gordon Brown has recently stated that we are facing a new world and how a global financial system requires global regulation. It’s hard to disagree at present and there can be little argument from the banks, several of whom have been heavily assisted by the Treasury and Bank of England. We have seen a Japanese bank, Nomura, buying Lehman Brothers (defunct US bank) European operation, sovereign wealth funds buying stakes in US banks and increased global technology meaning the world is indeed, a small place.
Read on for expert opinion on the recent upheaval in the financial markets and the Governments housing proposals. You might also like to read articles in my previous Newsletters for more information on these subjects and more.
Andrew McLaughlin, RBS Chief Economist, comments on the international aspect to recent events reflected in a coordinated intervention by central banks, regulators and governments across the G7. Firstly in the UK:
- The Bank of England extended the special liquidity scheme (until 30 January 2009). This scheme enables banks and building societies to swap assets that are currently illiquid for UK Treasury Bills. The British central bank also joined with its US, Eurozone, Swiss and Japanese counterparts to announce a collective injection of up to $180 billion to boost liquidity. The BoE "share" of that injection will be $40 billion.
- The Financial Services Authority banned the short selling of financial stocks in the UK. This refers to the practice of betting that shares will fall in price, which has been blamed for the driving down the price of banking stocks.
- The government bypassed competition rules to pass the Lloyds/HBOS deal. The Competition Commission had previously said it was unacceptable for a bank to have more than 25% of the retail banking market.
- In the US, Treasury Secretary Hank Paulson announced the creation of a $700 billion fund to remove the illiquid assets that are "choking off the flow of credit that is so vitally important to [the US] economy". The Treasury will use the fund to buy troubled assets from financial institutions, assuming Congress passes the proposals later this week.
The decision to intervene so heavily will not have been taken lightly. In addition to the obvious cost to taxpayers, at a time when public finances are already under pressure, there is the problem of "moral hazard". By preventing an institution from failing, or softening the blow for investors, the authorities might entice them to take greater risks in the future. That may be so but, given the alternative, it is a cost worth bearing. John Kenneth Galbraith once said: "politics... consists of choosing between the disastrous and the unpalatable." So it is with the credit crunch.
Despite the scale of policymakers’ intervention, the economic outlook has clearly deteriorated; the financial sector is too important to overall economic activity for this not to be the case. Data releases last week shed further light on the current state of play. In keeping with the downbeat mood, inflation and unemployment are both rising in the UK. The fifth consecutive rise in CPI inflation, to 4.7% in August, led to another letter from the Governor of the Bank of England to the Chancellor. The unemployment rate rose to a two-year high of 5.5%, reflecting a fall in the number of jobs, and an increase in the number of people wanting one. More encouragingly, retail sales were surprisingly buoyant in August, rising by 1.2% in real terms (3.3% higher than a year ago).
Looking at the UK mortgage and housing market, the raft of measures introduced by Alistair Darling now seem a distant memory but were not received warmly at the time.
Emma Paplow, Policy Analyst at the Association of Mortgage Intermediaries
"The suggestion of a temporary suspension "holiday" on SDLT will only serve to alleviate the housing market conditions in the short term, creating a temporary, false economy with the potential for a house price bubble to emerge. We believe an increase in the existing thresholds, and a longer term review of the existing structure with international comparisons especially in view of the increase of stamp duty provided in the 1980s to borrowers up to a level of £250k is what is required.
The Equity Scheme will only be offered to first time buyers and those looking for a new build property. With only 32% of loans up to July this year being offered to first time buyers (68% being provided to home movers/remortgages) this will not go a long way to helping the vast majority of families facing a rising cost of living and falling house prices. Help is required for the wider market therefore we would propose that this scheme should also be aimed at assisting all types of consumer.
More general clarification is also required of the scheme including both the `fee` applicable at the end of the 5 years term and exactly which individuals are eligible for the scheme, what is the scheme’s definition of First time buyer for instance which is typically a difficult definition to determine and how this will fit into the current regulatory regime.
We welcome the reforms made to ISMI however with the average house price in the UK currently standing at £165,654 (source nationwide house price index) this will only go to assist a small number of borrowers and will not be effective until 2009.
We recognise that Social housing is required in our market however this sector must form part of an overall wider market place which works in conjunction with the private rental sector. A major increase in social housing specifically the proposal to deliver up to 5,500 more homes over the next 18 months may inadvertently affect this private rental market.
A further solution would be to offer Lenders a similar facility to housing associations who offer shared ownership schemes however on a reverse basis, offering clients with substantial equity in their property the facility to borrow back percentages of the equity in their home at times of market difficulty, with the option to buy back these proportions when the market and borrowers circumstances improve."
Times are certainly tough at present. If there is any way you feel we can help, please do not hesitate to get in touch. Every effort will be made to assist you.
If you have any queries regarding your current mortgage arrangements, please do not hesitate to Contact Us.