Recovery position

Some of the architecture of recovery is now in place with substantial government and central bank interventions, but more is to come. We have yet to fully quantify the costs but we have now begun to allocate the blame. The timescale for recovery remains elusive with views ranging from soon to some years away.

Beating recession

With two successive quarters of negative growth, the UK is now in recession. Unemployment is rapidly rising towards two million and expectations are that it might reach three million.

The bank base rate has been cut from 5.5 per cent to 1.5 per cent in less than 14 months. In January, the government announced its third package of fiscal stimulus measures to deal with what was described as the intensifying global economic downturn and give a stimulus to confidence and recovery.

The plans included extending the drawdown window for new debt under the government’s credit guarantee scheme aimed at helping interbank lending and establishing a new facility for guaranteeing triple A asset backed securities, following on from the Crosby report recommendations. However the government has chosen to restrict this to the deposit takers already favoured by its existing interventions.

Other proposed moves included: extending the maturity date for the Bank of England’s facility for allowing the banking sector to swap less liquid assets; establishing a new £50 billion Bank of England facility for purchasing high quality assets – the so-called measure to assist quantitative easing, ie, putting more money in the system; and clarifying the Financial Services Authority’s regulatory approach to capital requirements, indicating it was taking into account the recapitalisation undertaken, although there would be lenders who might challenge this view.

The government also announced that it intended to encourage Northern Rock to increase lending rather than continue to run down its mortgage book.

The aim of this latest package is to increase the level of lending in the economy for homes, business and consumer credit. However, with specialist lenders and many building societies now doing little new business, and the withdrawal of foreign bank activity alongside the need to repay previous government loans, lenders that remain active are still struggling to find sufficient funds to meet demand. Little wonder that there has been renewed discussion around the return of local authority mortgages and municipal banks.

The continued contraction of the mortgage market is exemplified by figures on the products available. In January 2008, according to Defacto, a product database, there were 7,829 products in the market (including 2,130 first-time buyer and 1,520 adverse credit loans). In January 2009, this was down to 2,751 (a reduction of 65 per cent, with first-time buyer loans down to 955, minus 55 per cent, and adverse credit down to 121 or minus 92 per cent). Moneyfacts data shows a 99 per cent reduction in the number of 95 per cent loan-to-value products.

Sales in the third quarter of 2008 in England and Wales stood at 138,614 compared to 339,471 the year

before – down 60 per cent. The Bank of England approvals data showed approvals for purchase in December at 31,000 – down from the previous six-month average of 32,000 and remortgages were 36,000 down from the six-month average of 66,000.

House prices have continued to decline, Nationwide reporting a further fall of 1.3 per cent in January. But this was albeit half the reduction recorded in December (2.5 per cent). This raised the question of whether the market is close to bottoming out.

There was a range of forecasts for house prices at the end of 2009 with most centred around a further 10 per cent fall with recovery beginning in 2010. This would suggest a peak to trough fall of around 25 per cent after a 10 to 15 per cent fall in 2008. But some predict a peak to trough figure closer to 40 per cent.

Much now turns on the scale and intensity of the recession and the extent to which home buyers lose their jobs and have difficulty servicing their mortgage debt. Sharply rising possessions would trigger further negative equity (currently estimated as impacting some 400,000 households, with the Financial Times estimating that one in 20 homes sold in 2008 went for less than the purchase price).

‘The recovery will come from a myriad of actions and measures rather than one big bang’

An increase in mortgage supply is critical to recovery along with measures to help slow the rate of repossessions. The government’s mortgage rescue scheme is now up and running and the negotiations for the homeowner mortgage support scheme (HMSS) continue with a view to launch in April.

Cause for optimism

At this stage, there is considerable uncertainty as to the numbers of home buyers who might benefit. A common view is that it will be a few thousand. Putting this alongside substantial interest rate cuts, the improvements to support for mortgage interest and lenders own increased forbearance, it is possible the numbers under pressure could be much reduced. Third quarter figures from the Financial Services Authority indicate 13,161 homes were taken into possession, an increase of 2,083 over the previous quarter and 92 per cent up on the year before.

Continuing this positive note, Nationwide estimated that 750,000 first-time buyers were waiting to enter the market and that new supply had continued to decline. So once confidence and the supply of mortgages recovers the market has the potential to move forward rapidly. With an expansion of shared equity and rent to buy schemes helping to ease access to home ownership, much now turns on a significant volume of buyers being willing to re-enter the market.

Housing minister Margaret Beckett was criticised in mid-January for offering some mildly upbeat remarks about the housing market. In my view, she was right. Her main accuser, the Sunday Times, had an article in the same issue that criticised her titled ‘why it’s time to take the plunge’. Enough said!

The Institute of Fiscal Studies recently estimated that the government had committed around £1 trillion to help the financial system and the economy. The International Monetary Fund opined that the UK will suffer a significant recession. The pound has slumped against both the dollar and the euro and UK debt is now 47.5 per cent of GDP, although inflation fell to 3.1 per cent in December. RBS is now 70 per cent owned by government and the Lloyds Banking Group 43 per cent. Both will report losses in their 2008 annual accounts.

In the US President Obama is seeking support for a new $884 billion (£610 billion) package of measures in which the creation of a so-called ‘bad bank’ for holding ‘toxic’ assets may have a part.

US house prices fell more than 18 per cent in the year to the end of November. Since the peak in July 2006 the market has declined by 25 per cent. It is suggested that prices are between a half and two-thirds of their way through the total likely decline in this cycle.

The G20 meeting in April will focus on managing a recovery and further international coordination. There is now a concerted drive to expunge bad assets though no real agreement yet on how.

There is evidence that confidence is returning to some markets. But the supply of funds is still too limited which is why central banks around the world have been so busy supplying new lines of credit.

The reality is the recovery will come from a myriad of measures and actions rather than ‘one big bang’ and this will be as much about consumers and businesses as it is about government. Kennedy’s clarion call in 1961 ‘ask not what your country can do for you – ask what you can do for your country’ has something to commend it.

Peter Williams is executive director of the Intermediary Mortgage Lenders Association.