2014: The Mother Of All Mortgage Famines?

READERS OF THE CANVEY BEAT and my own personal blog will have noted that I have been totally bemused by this government’s financial strategy since the sub-prime market collapsed and presaged the impending credit crunch. So far Labour has propped-up the banking sector to the tune of over one-trillion pounds, which is enough to make anyone’s head spin.

If you earned a pound every second, you would have one-million pounds after two months. After 32 years you would have amassed a one-billion pound fortune; but to hit your target of one-trillion pounds: it would take you 32,000 years…

Of course, this one-trillion pounds does not form part of the government’s debt – because it is offset by shares in the supported banks and other ‘securities.’ Only the 178 billion pounds that the government has spent (some would say wasted) on printing further money and devaluing the pound is often mentioned. But even that palls into insignificance when you consider that the financial prop holding up the inevitable collapse in the housing market is 300-billion pounds. In effect, that is the amount of money thrown at the mortgage market by this government to dull the impact of the US sub-prime collapse on the city.

But that three-hundred-billion pounds is quickly being eaten-up. £300,000,000,000 does not go far in meeting demands for mortgages on properties that are, by any measure, significantly over-priced.

Today saw the first report, in The Daily Telegraph, warning of the inevitable unravelling of the government’s financial strategy:-

The Council for Mortgage Lenders (CML) said a £300bn funding gap – the difference between what property buyers wanted to borrow and the funds available to lenders – would open up when existing government support schemes expire in 2014.

“The collapse of wholesale funding markets has left a £300bn gap in mortgage funding,” the CML said. “That gap has been filled temporarily by government funds through the special liquidity scheme and the credit guarantee scheme. By 2014, however, both of these schemes will have expired. Hanging over the mortgage market therefore is a major uncertainty about how lenders will be able to refinance this £300bn over time.

“Unless there is a policy approach intended to encourage the development of wholesale funding, we are likely to see a long-term decline in choice for UK mortgage customers.”

It added that, without support from government policy, it might be difficult to re-establish a sustainable, long-term “securitisation” market on the scale needed to plug the funding gap. Securitisation involved parcelling up existing mortgages and selling them as interest-bearing bonds to institutional investors, raising funds for new lending.

“That would leave firms continuing to rely on government funding, and the UK at risk of a chronic undersupply of credit – and the rationing of mortgages for customers – for many years to come,” the CML said.

Even if wholesale markets did start functioning again on the scale seen before 2007, which the CML said was unlikely, there was “considerable uncertainty” over whether lenders would be able to repay government funding in full to the timetable currently envisaged. “It is likely therefore that an extension of the period of government support will be needed,” it added.

“One of the consequences of the closure of wholesale debt markets since 2007 – and the ensuing funding gap – has been a dramatic reduction in competition in the UK mortgage market,” the CML said.

“Emergency government action to fill the gap has been welcome. But government support has focused almost exclusively on larger deposit-takers, reinforcing the lack of overall competitiveness in the mortgage market.”

It is clear from this that government intervention has had no impact on solving the economic problems faced by the UK economy. All it has done has been to put-off the problem until after the general election – to delay the day of judgement. The fact is that, whichever party is elected this year, its government will not have access to another £300 billion to help meet mortgage demand and, with so few buyers, property prices will finally fall off the cliff.

But, unfortunately, it does not end there…

What property developers, in their right mind, are now going to construct ‘affordable housing’ in the face of a mortgage famine? And what young couple are going to gamble their hard earned money on buying a property whose inherent value will not allow them to sell at a profit to move up the housing ladder as their family grows?

More importantly, for over-crowded islanders, is how long will it actually be before we obtain the additional housing that we so desperately require?

It is not the Tories that are killing home-owning ambitions. It is the economic incompetence of the Labour government, which is incapable of understanding the basic relationships between financial policy and its own housing programme.

Exactly the same incompetence that it showed in its disastrous immigration policy, which led to the housing crisis in the first place…

… (16/02/2010) – UK House Prices To Slump As Credit-Crunch Returns

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7 Responses

  1. And what the governement is not revealing is how much it has been forced to pay-out of its ‘insurance fund’ for sub-prime losses.

    As you correctly identify – the problem has not gone away it is just being concealed in a number of ‘off balance sheet’ transactions and a veritable forest of government paper in a forlorn attempt to buy itself out of the recession.

    As many residents have found out to their cost you cannot buy yourself out of a financial rut by using your credit card to pay your mortgage. But that is exactly what this government is doing.

    And that is why we need less rhetoric from Cameron and much more details about what he intends to do to set things straight.

    We need honesty from the political parties and that means facing up to the need for swinging cuts.

    (i particularly liked your piece about the 2009 base rate cut being an own goal Ted. That was definitiely where things went drastically wrong).

    • The most absurd claim in all this, Cynical, is the government’s that ‘things would be much worse had we not intervened in the way we did.’

      There is no data whatsoever to substantiate that statement in any way.

      And the arrogance of any government to commit all its resources to a single strategy is simply appalling. Taxpayers’ money is not theirs to gamble with in that way.

      No General commits all his reserves to a single strategy except in a last ‘do or die’ attempt. (And most would have too much compassion for their troops not to unconditionally surrender).

      Your comparison with householders paying their mortgages on credit cards is apt. Eventually the householder will be forced into bankruptcy.

      What is not clear, at this stage, is just how long any future government will be able to keep this Titanic economy afloat…

      • Do you think a Cameron government is the answer Ted?

        • I’m not sure there is ‘an answer,’ Cynical.

          This is probably the first time that any incoming government will have no financial reserves in which to pursue its own policies.

          Whomever is elected will find themselves in a very unenviable position.

          For my part, I find myself wondering who will stand the best chance of negotiating with the IMF when the economy finally goes belly-up. And for my money that has to be the Conservatives, who understand the economy better.

          What troubles me is, if you speak to any average voter, they understand what the issues facing the country are: housing; immigration and debt. But the Conservatives are not putting forward an intelligent plan to address these issues. It should not be difficult, because all affect one another. But it seems they do not yet have the courage to say what every average voter knows: we must put a stop to immigration; we must provide more homes; and we must reduce our country’s debt to a level where it is once again sustainable.

          What’s done is done. Voters have only themselves to blame for electing a government that permitted such immigration that our housing stock was taken up by foreigners. And voters have only themselves to blame for permitting the ‘politically correct’ to take control of their language, law-courts, and traditional British values.

          In essence: abstaining voters have only themselves to blame for not taking part in the democratic process.

          Debt reduction is the key to freeing-up resources to satisfy our housing requirements – and to funding the UK Border Agency to put a stop to net immigration; but it is going to take some time before free speech will once again be recognised as the great British tradition.

          And locally we have a problem, don’t we? While the Labour candidate, Julian Ware-Lane is prepared to test public opinion by posting on this blog and is not afraid of expressing an opinion, the Conservative candidate, Rebecca Harris, has no such confidence.

          Personally, I am inclined to support someone whom is prepared to listen and interact with me, rather than cast a vote for someone who, apparently, has no local opinions…

          • A property price collapse? what do you think Ted?

            • I think that is inevitable, Cynical. But it is something that is long overdue in the British housing market.

              Householders may not be keen to read this; but, in their heart of hearts, they must realise that property inflation could not be sustained over the long term. The fact is that we need to return to a position where property is given its proper value in society. And we need to return to a position where citizens are not seduced into ridiculous speculation by totally unqualified estate agents.

              It says much of the British housing market that estate agents pass themselves off as knowing agents in a market that is only designed to provide themselves with a substantial income. Why a Labour government has not attempted to regulate their businesses is beyond me – because their activities not only undermine society, they undermine the very principles of fairness that a Labour government supposedly supports.

              (From this you may rightly suppose that I was a keen Blair supporter, despite my dislike for all politicians when I was in the military; but have since reverted to my own cynical view).

              I actually understand why people refuse to vote. But to do so is simply to allow the minority to govern.

              Please make your own personal vote count this year…

              • I have no hesitation in seconding that………………..

                :-)……………………..

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