This is a troubling graph.
It’s the three most recent months of mortgage lending (in GBP millions) compared with the 12 months prior, from UBS. Compared with now, the 1970s were just a blip — as UBS note. Why do we care? UBS banking analyst Alistair Ryan puts it well:
… once declining house prices becomes the only thing that the UK population can recall, a reduction in demand for home ownership risks becoming permanent. Nothing wrong with that, one might argue. In Victorian times, home ownership was as low as 10% and apart from the Dickensian squalor, things seemed to work well enough. The minor issue along the way is the £1.2 trillion of mortgage debt accumulated by the same population along the way. We believe it is highly unlikely that a nation weighed down by the rising negative equity implicit in permanently declining house prices will be anything other than a deflationary nation.
Ok, aside from the reference to Dickensian squalor, this is a good point. A mass of negative equity puts extreme pressure on any economy, but the UK, so dependent on the formerly unstoppable increase of house prices in recent years, is particularly exposed. So what do do?
UBS, for one, is suggesting the revival of another (non-Dickensian) British institution - Northern Rock. Their reasoning:
Since being taken into Temporary Public Ownership, Northern Rock has been set one straightforward task: to pay back the government loan extended to it as it collapsed, as rapidly as possible. It has been diligent in pursuing this goal and by the end of September it had repaid £15.4 billion of the year-end 2007 loan balance of £26.9 billion. However, “the Company’s success in repaying the Government loan has been achieved primarily through its mortgage redemption programme”. This is having a very significant effect on the UK market as a whole.
To wit — these charts:
In otherwords, a net lender of £1.7bn a month has become a net redeemer of £2.2bn a month. That’s a £3.9bn swing, and a sizable chunk being taken out of the mortgage market, which, in the current climate, is unlikely to have been replaced by competitors. Hence, this conclusion from UBS:
In essence, we believe the Rock is now being run to a policy goal that is an historical one. Repaying the UK taxpayer at speed may have been logical in the environment of late 2007. It seems wholly counterproductive now. We believe there is no practical constraint on the Rock reversing course once more and restarting lending. While it has laid off 1,500 staff, it retains all the necessary infrastructure for its mainly broker-distributed model to function once more.
Return of the Crock! Run taxpayers, run!
Related links:
Profits goal for UK public bank stake - FT
IMF warns of UK house price bubble - 2003 BBC story
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